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- Maintain long USD versus JPY…
- …raise stop loss (profit protection) from 101 to 102.50
160905-FX-Conviction-update-Long-USDJPY-profit-protection-adjustment.pdf (197 KB)
Long USD versus JPY; profit protection adjustment
Since initiation on 23 August, our long USD versus JPY call has yielded almost 4% as financial markets start to price in that a Fed rate hike may be sooner than later. Our view that the Fed is likely to tighten monetary policy later this year in December is about 60% priced in by financial markets.
This morning, Bank of Japan governor Kuroda reiterated that there is ample room to increase monetary stimulus. The negative interest rate policy is deemed to have succeeded in lowering funding costs of firms and households. Financial institutions’ lending attitudes have continued to be proactive despite profits being squeezed as a result of the negative interest rate policy. Kuroda added that other new ideas should not be off the table. However, direct underwriting bonds and/or monetizing deficit should not be done. He also acknowledged that additional monetary stimulus entails costs and that a cost benefit analysis should be done. This is due to the fact that the negative interest rate policy on profits of financial institutions in Japan tends to be large as the amount of outstanding deposits far exceed that of lending. Hence narrowing of spreads between deposits and lending rates due to negative interest rate policy would impact financial institutions profits. Nevertheless, he concluded by stating that the BoJ should not hesitate to go ahead with more monetary stimulus as long as benefits outweigh the costs of such actions.
Looking ahead, we expect the JPY to weaken further as speculative long positions are unwound ahead of the BoJ monetary policy decision on 21 September. Our short term target is 107 and we have raised our stop loss (profit protection) from 101 to 102.50.