If you’re playing the pop to the topside in USD/JPY and were lucky enough to get in below 86.300, keep stops very very tight.
In recent weeks Japanese exporters have grudgingly lowered their hedge targets for USD/JPY to 85.00/90.00 from 95.00/100.00 earlier in the year. That means they will be much more aggressive about hedging overseas earnings into any strength than they were earlier this year.
Global investors have been big hedgers in recent sessions as well, and more sales are expected on rallies.
One final factor is the dreaded PRDC, power reverse dual currency bonds. These are turbo-charged structured products that prompt very heavy JPY hedging the more its strengthens. It is like being short options: the lower the market goes, the longer you get. Not the way you want to be. Heavy USD/JPY selling in recent sessions has been linked to these products, which are popular with yield-starved Japanese investors.
USD/JPY is edging up on the firmer yields in the wake of the ISM data which suggests the Fed will not make any dramatic moves next week. It trades now at 86.18.
