Earlier this week, Morgan Stanley shifted away from the bearish USD/JPY view they have held since January.
MS’ reasoning is that Broadening USD strength on the back of the US economy showing signs of developing escape velocity will help USD/JPY. In addition, MS thinks that hawkish BoJ sound bites may soon have to give way to a more realistic interpretation of Japan’s growth and inflation outlook, opening the door for additional BoJ easing in autumn.
“Indeed, as well as USD strength, we believe that JPY is now set to weaken in anticipation of renewed BoJ policy action, given the weakness of the consumer-related data in Japan. We expect the BoJ to moderate its recent hawkish tone, allowing USDJPY to extent gains towards our target of 104.00,” MS projects.
Technically, MS notes that volatility has started to pick up and the currency pair is trading higher out of the recent channel, making a near term high at 103.09.
“USD/JPY has completed an a-b-c-d-e formation and started a new wave. Positioning according to our tracker is neutral, suggesting there is room for positions to be taken,” MS argues.
“However, trading USD/JPY could be bumpy, given the increasing chance of the current risk tolerance turning into risk aversion. Japan’s strong foreign asset position could spark a round of substantial safe-haven inflows,” MS warns.
In line with this view, MS entered a long USD/JPY position today via filling a limit order at 102.50, targeting 104, with a stop at 101.80.