Trade Idea: Sell USDJPY 109.85, target 107.50, stop loss 111

From the FXWW Chatroom: Our view: · Impact from Friday’s payrolls report may ultimately be higher volatility and reduced risk appetite as opposed to broad based USD strength. This should be conducive to JPY strength. The surprising strength in average hourly earnings saw equities trade sharply lower late last week and yields extend their rise. This price action looks consistent with investors moving to price in increased risk that greater underlying inflationary pressure may be taking hold. However, this failed to translate to consistent USD strengthening, with non-dollar safe havens holding their ground in the face of dollar appreciation vs. risk currencies. This lack of consistency is not altogether surprising, since the payrolls is but one data point and the rise in yields was already well entrenched before the release. Going long non-dollar safe havens may be a more attractive trade than outright USD longs at present.

· The domestic flow backdrop leaves JPY particularly well positioned to benefit from increased volatility and higher risk aversion. First, the rise in USDJPY last week takes the pair towards where many exporters set their budget rate around 110. This should see increased JPY buying from this sector helping to cap rises in USDJPY. Second, flight to quality by shorter-term investors and JPY buying by real money investors who invest in Nikkei stocks under an FX neutral strategy may feature.

· We see few domestic factors which look likely to disrupt this trade. Both the BoJ and fiscal authorities have expressed some concern with the recent pace of JPY appreciation, but such verbal intervention has done little to stem the move. Similarly, BoJ pushback against the view that a shift in YCC may be forthcoming has likely helped to limit rises in yields, but transmission to FX has been weak. The conclusion is that more direct action to avert JPY appreciation may be needed to overwhelm externally motivated strengthening and we be

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