Buy Yen, Sell Dollars: Barclays Trade of the Week

Bank of Japan Governor Kuroda denied press reports that lead to a sharp appreciation in the value of the Yen. Image © European Central Bank, reproduced under CC licensing

- Strategists at Barclays recommend chasing further Yen strength

- Reports suggest Bank of Japan is rethinking policy

- But RBC Capital markets are inclined to fade JPY strength

Foreign exchange strategists at Barclays are recommending clients buy the Japanese Yen while selling Dollars in a week that starts with a hefty fall in the value of USD/JPY.

The Dollar-Yen exchange rate is trading down at 111.17 at the time of writing, having peaked at 113.17 in the previous week.

The cause of the rise in the value of the Japanese currency is two-fold: 1) News reports suggest the Bank of Japan (BoJ) is rethinking its current policy stance and 2) the Dollar fell versus Yen on Friday after U.S. President Donald Trump reinforced his criticism of the Federal Reserve's policy on raising interest rates.

Reports suggest Japanese policy makers are considering measures to soften the side effects of their aggressive monetary easing campaign. This is being read by markets as a sign the BoJ might be walking back from a policy stance that has weighed heavily on the value of JPY.

Barclays believe the move lower in the currency can extend, and as such their trade of the week is to short the USD/JPY exchange rate, from a reference point of 111.58.

Analysts are targeting a fall to 108.10 with a stop loss being set at 113.40 in the event of the market moving against them.

Justifying the call, Barclays note JPY shorts largely unwound and the Yen should receive support via its 'safe haven' credentials from the ongoing trade war and currency war tensions.

A key Bank of Japan meeting looms next week and Barclays note US-Japan trade discussions may start this week which may weigh on risk sentiment

The move lower in USD/JPY was foreseen by Jordan Rochester, an FX Strategist at Nomura who foresaw the pair peaking in the mid 1.1350s - 114s, which has so far turned out to be a surprisingly accurate forecast.

Rochester saw renewed strength in the Yen as being the main driver of a drop due to increasing trade war concerns causing safe-haven flows.

The yen appreciated and yields on Japanese government bonds surged as bonds were sold off, with the yield on the ten-year bond jumping 6bp on opening amid speculation that the BoJ might modify its yield control policy.

The sell-off in the Japanese fixed income market triggered a fixed-rate operation announcement from the BoJ where the bank offers to buy an unlimited amount at a fixed price of 0.1%.

"The fixed rate announcement has helped stabilise the yen market for now, but price actions are likely to remain volatile ahead of the BoJ meeting next week on 27-28 July," says Morten Helt, Senior Analyst at Danske Bank.

Strategist Adam Cole with RBC Capital Markets is a little more sceptical on the legs this bout of Yen strength actually has.

In a briefing to clients, dated July 23, Cole says there is little to stop the BoJ revising down its inflation forecast at next week’s policy meeting.

"This makes the timing of Friday's story on BoJ policy normalisation difficult to reconcile. While we agree that the YCC policy has outlived its usefulness, this has been apparent for some time and the BoJ has pressed on with it regardless. Timing the reconsideration of the policy to coincide with a downward revision to inflation projections would be a curious choice and it is by no means certain anything will come out of next week's policy meeting," says Cole.

Weekend press reports saw some back peddling from the initial comments reported on Friday with BoJ Governor Kuroda proving dismissive of the reports.

“I know absolutely nothing about the basis for those reports,” Kuroda said in Buenos Aires, where he is attending the meeting of finance ministers and central bank governors of the world’s leading 20 economies.

"Our inclination is to fade the JPY outperformance," says Cole.

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