Treasure Chest | Jan 25 2012
What?
CommBank's FX expert Richard Grace has discovered what he believes is a "golden short-term opportunity to sell USD/JPY".
What happened?
USD/JPY has unexpectedly rallied to 77.85 (intra-day) overnight. Grace believes the direct catalyst for the intra-day rally in USD/JPY appears to be a result of a well-known financial newspaper publishing an article indicating that Japan will record its first trade deficit since 1980 and "Japan's export engine may be running out of steam". However, says Grace, the newspaper article refers to the annual trade deficit, not the monthly trade deficit. The fact is Japan has recorded a monthly trade deficit for the last 9 consecutive months, ever since the tsunami hit.
Background
It is Grace's view that Japan's annual trade deficit will be a direct result of the tsunami. He believes it is too premature to suggest that something more structural is occurring with Japan's exports. Despite recording a trade deficit for 2011, Japan will still record a current account surplus, equivalent to some 2.2% of GDP, he points out.
Japan's current account surplus and the US Japan relative interest rate differential are key drivers of the JPY. Relative US Japan interest rate differentials are unlikely to widen in the near term. Grace predicts the FOMC is likely to lengthen their policy guidance towards keeping rates at current low levels for another twelve months, out to mid 2014, hence Japan's entire real yield curve remains above the US real yield curve, and this is not set to change anytime soon.
What to do?
Grace would suggest selling USD/JPY at current spot 77.70, targeting a short-term move back to 77.00, while placing a stop just above the 78.37 (200 day moving average) at 78.50. The risk-reward ratio of the trade is not the best, he acknowledges, "but the conviction of the move is strong".
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