Risk aversion remains in driver’s seat but market is already long JPY

From the FXWW Chatroom – While New York Fed President Dudley has added his voice to those of Fed officials predicting a rate hike by the end of 2015, US front-end rates are again at new lows when looking at 2-year yields at 65 bps. As we publish, the Japanese stock market (Nikkei 225 Index) is off by 700 points now having earned all gains made during 2015. As always, USDJPY is responding to such weakness and the sharp fall in the Nikkei 225 index signals significant downside risk to USDJPY from current levels . Still, we stress that FX positioning will provide some cushioning here. BNP Paribas FX Positioning published yesterday reports that markets hold a net long JPY exposure at +14 – close to multi-year highs. Accordingly, there is no short JPY exposure to liquidate. For USDJPY to fall further markets will need to add to already long JPY exposure which remains a significant challenge. With a 2.5%+ selloff in the S&P 500, falling commodity prices, and pressure on high yield debt markets dominating. In currency markets, the USD is losing ground vs. the funding currencies but gaining ground vs. the commodity bloc and EM. We expect Fed tightening to give way to broader USD strength over time, but in the current risk environment we think USD-commodity bloc long positons should continue to outperform and we remain long USDCAD targeting 1.35. We also like long GBPAUD targeting 2.25. Conference Board consumer confidence is the main data focus for today in the US. [BNPP] 

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