- With most currency pairs in limbo awaiting the results of the weekend summit in Europe, we turn our attention to the JPY, which has been somewhat sidelined in recent weeks.
- We find that direct investment overseas by corporate Japan is providing an alternate channel for recycling Japan’s current account surplus and provides an important limit on scope for appreciation. This flow, combined with the prospects for tactical intervention on tests below 75, a bottoming in US front-end yields, and our expectation that we are closer to a sustained recovery in risk sentiment, leads us to scale back our expectations for yen appreciation.
- We maintain a bullish bias for the currency but now target USDJPY at 75 on a one- and three- month basis, up from 70 previously, while maintaining our 12-month target at 80.
- Inside we look at two option trade structures that benefit from moderate near-term JPY outperformance versus the AUD and GBP. We see good risk / reward in short-dated GBPJPY reverse knockout puts. We also recommend a six-week AUDJPY put spread structure to position for a potential policy disappointment from Europe and the latest slide in commodity prices.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS