Do you want to know where Morgan Stanley want to go long USDJPY again?
USD perma-bulls are lining up another long
Our old mates at Morgan Stanley are drooling over another long USDJPY trade. On their last outing they went long at 112.50 looking for 120.00 but bailed at 113.12. (a good profit in anyone's book).
This week they write the recent falls off as increased Japanese hedging.
"Buying the USDJPY dip. A deeper dive into the JPY shows Japan has turned FX risk averse Hedging activity has been the driver of JPY strength. However, US interest rates should increase over time, suggesting higher hedging costs. Once we see inflows into JPY-denominated money markets slowing, the JPY is likely to fall. We suggest buying USDJPY on the dip to 109.50."
Further on they go into greater detail and do a fine job of explaining the mechanics behind Japanese hedging;
"Bottom Line: We suggest buying the USDJPY dip. In December last year, the wide USDJPY basis acted like a 'tax' on FX-hedged foreign asset positions of Japan-based investors. For Japanese investors to hedge, they had to borrow the foreign currency (say USD) to sell. That USD is more expensive if the basis is wide. Today as fiscal year end approaches, the basis has narrowed, unleashing pent-up hedging activities, pushing the JPY higher. This hedging is however limited up to the desired hedge ratio for current foreign asset holdings. The life insurance company USD hedge ratio has reached pre-Abenomics levels already. When the Fed hikes rates further, hedging costs will increase, suggesting the hedging ratio will fall again. The recent increase of JPY money market holdings by foreign entities has created a pool of funds which may have been already converted into USD offshore liquidity. Once foreign-funded JPY money market holdings start to decline, the JPY will come under selling pressure again."
Morgan's are looking to buy USDJPY at 109.50 with a 118.00 target and 108.20 stop.
They are also still running their AUDUSD short but have pulled their stop down from 0.7800 to 0.7760 (but don't explain why).
"We continue to hold this position following the weak labour market data for Feb, and as iron ore prices have started to decline. In particular we watch for the seasonality in Chinese commodity purchases, which have historically peaked around March. Iron ore prices have already started weakening. Our China property leading index is also pointing to weaker new starts in 2Q17, which may reduce the support for commodities. The RBA appears to be on hold with rates for the moment but could change should terms of trade and employment data weaken. Sydney house prices continue to soar, and we know the RBA are concerned about this. Our economists see a slowdown in the housing market as a major indication for the RBA to consider cutting rates in the future. The risk to our trade is that iron ore prices start rising again due to stockpiling."
Here's their brief for the majors.