Treasure Chest | Oct 14 2011
By Greg Peel
What?
Danske Bank advises its clientele to go long USD-JPY at 77.30, targeting 79.80, with a stop-loss at 76.0.
Why?
The USD is likely to strengthen, but so too are many other currencies as concerns about European banks and sovereign ratings are subsiding. The yen remains as the logical candidate to be left behind.
Background
Earlier in the year the US dollar was under severe pressure given political wranglings, double-dip fears, and the impact of the Standard & Poor's credit rating downgrade. The result was that investors rushed “safe haven” currencies, particularly the Swiss franc and gold. The Aussie was also forced to new highs and the Japanese yen became an odd safe haven of sorts given its multi-decade recession and recent tsunami disaster.
Money flowing back to Japan to support reconstruction investment earlier in the year pushed the yen up to the point the Bank of Japan was forced to intervene, but the subsequent slide in the US dollar led to even more definitive intervention. The Swiss National Bank then became even more emphatic in its own currency intervention.
The European situation then took a turn for the worse, sending funds back into the US dollar to relieve the pressure. Gold in particular took quite a tumble. But with Europe potentially about to finally resolve its debt issues, the US dollar is under pressure once more.
Most notably, US interest rates have spiked very rapidly. Yet Danske Bank's forex team notes the yen has been stuck in a range between 76 and 78 for the past two months. Until September, the USD-JPY exchange rate closely tracked the two-year swap rate between the two but since then it has failed to respond to the move in US rates.
Danske thus expects then yen to break out of the range. Note that while the Aussie is quoted in US dollars, the yen is quoted the other way around, that is as the yen equivalent of one US dollar. A “rising yen” is reflected by a fall in the USD-JPY exchange rate, and vice versa.
Danske expects the US dollar to gain strength on the back of recent economic data which indicate there won't be a double-dip recession after all. However given the euro, and other major currencies, are likely to rally themselves on the back of reduced global risk from European debt, the yen remains as the obvious candidate for which to benefit from relative dollar strength.
Danske thus recommends going long USD-JPY at 77.30 with a target of 79.80. The team has set a stop-loss at 76.00 and acknowledges the risk of renewed uncertainty if the European situation deteriorates again, but given this would mean a rise in the yen there is every likelihood the Bank of Japan would intervene once more.
In other words, the trade potentially has its own put option.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
