Stick with USD longs…USDJPY to continue higher
We decided to stick with and re-emphasise our bullish USD view this week and finally our favoured USDJPY quant trade recommendation is gaining traction over the past 48 hours. We target 102.80 (entry 98.00, stop 96.50). We have often stressed that USDJPY represents the purest form of the USD because Japanese monetary policy is so loose and yields remain at low levels. The US yield advantage is rising against all G10 currencies and now signals strong upside for DXY. Furthermore, the very tight relationship between USDJPY and the Nikkei remains in place indeed currently, it seems that USDJPY is leading the Nikkei higher. We believe strongly in this relationship and look for it to remain tight as USDJPY moves higher (see chart). In today’s data, our US economists are looking for a 2.4% m/m downward correction in July new home sales after a strong reading in June. Over the months ahead, we expect US data to support the Fed’s QE tapering bias, leading to more broad-based USD gains.
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BNP Paribas