For most of 2014, a catalyst for a significant move in USDJPY has been lacking, says BNP Paribas.
However, now BNPP believes that a number of global and domestic factors are coming together to signal that the yen is about to trend down again, with the first indications that the long-awaited foreign reallocation of Japanese investor portfolios is starting to take place.
“In the past week, markets have increasingly focused on the ongoing portfolio review of Japan’s Government Pension Investment Fund (GPIF), with an announcement on the new basic portfolio to be made in the coming months, probably in August. Considering that the GPIF is under pressure to achieve higher rates of return on investment, it is generally expected that the portfolio allocations will shift away from Japanese government bonds in favour of domestic stocks and foreign assets,” BNP projects.
“Although we would be careful not to overstate the importance of a one-off JPY outflow, we believe it should be seen in the context of two key yen-negative developments: a) an upward trend in US yields and b) a deterioration in Japan’s current account position,” BNP adds.
In line with this view, BNP entered a long USD/JPY poistion at 101.85, targeting 105.50, with a stop loss set at 100.65.
Risk to the long USD/JPY trade. BNP outlines two main risks to the bullish USDJPY view:
First, the possibility that the US economy may struggle to live up to the recent shift in Fed expectations, triggering a pullback in US yields.
Second, the JPY could rise on any escalation in global political risk (Ukraine, Iraq), due to its traditional ‘safe haven’ role, supported by Japan’s large positive foreign asset position.