Medium term
/
Sell
Trade view / 02 January 2018 at 9:04 GMT

USDJPY looks lower on broad USD rout – #SaxoStrats

Head of FX Strategy / Saxo Bank
Denmark
Instrument: USDJPY
Price target: 109.30
Market price: 112.40
Background

  • The US dollar struggled against the major currencies in the dying days of 2017 as the market took a dim view on the currency despite the US tax reform bill that many thought originally might support the greenback on the potential boost to US growth and as corporations might invest more at home on the drastic chop to the headline rate.
  • Instead, the US dollar has weakened sharply as the focus may be on the implications for US fiscal dynamics, as this tax reform bill promises to blow a large hole in the budget deficit – perhaps as much as 2% or more of GDP. 
  • If the current account/fiscal dynamics situation is the general focus, then the Japanese yen may have some catching up to do versus its peers in strengthening against the struggling US dollar. While the Bank of Japan is maintaining a very loose monetary policy, the yen enters the year as far-and-away the weakest major currency, and Japan runs a large current account surplus of some 4% of GDP that contrasts with the US's deteriorating current account outlook under the new tax regime and the Fed's quantitative tightening, which only weakens the fiscal outlook further for the US. 
  • As the market has shown increasing signs in recent months of ignoring shifts in interest rate spreads (which have been USDJPY benign and even supportive), current account fundamentals may be back as a major consideration, requiring a significant adjustment lower in USDJPY if so.

Management and risk description

We look for USDJPY to drop quickly through the 112.00 level as the trading year gets into full swing, maintaining a stop well above 113.00 until we see a daily close well below 112.00. For the 2-3 week target, we look to take profit ahead of the Ichimoku daily cloud, which comes in the low 109 's over the next couple of weeks.But we we may choose to take quick or partial profits if the drop is particularly sharp before we have a look at this Friday's US employment data. 

Chart
Note that the pair has been interacting with its daily Ichimoku cloud for quite some time and finally breaking free of the thinning cloud could help catalyse a sharper selloff towards the target zone.
usdjpy
Source: Saxo Bank
 
Longer-term chart
USDJPY_w
 Source: Saxo Bank

Parameters

Entry: 112.25-50

Stop: 113.25

Target: 109.30

Time horizon: 2-3 weeks

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more
A compiled overview of Trade Views provided on TradingFloor.com is found here
02 January
Morris Morris
Any inference to the weekly? Looks inconclusive leading to indecisive!
02 January
Dance like nobody's watching Dance like nobody's watching
Why one doesn´t call the tax reform QE4?
03 January
edo edo
Why would de US current account deficit further deteriorate due to FED tightening? I would rather think the opposite...
05 January
marran marran
this isn't looking very good

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