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Dollar/yen enjoyed a relief from North Korean tensions and moved higher, despite an excellent GDP report from Japan. What’s next?

Here is their view, courtesy of eFXnews:

Bank of America Merrill Lynch FX Strategy Research makes an interesting argument about  JPY price action and North Korea tension-related risks.

“Japanese investors have been buying foreign securities over the past several weeks, and de-risking or repatriation by Japanese investors has not materialized yet, in our view. CFTC’s IMM statistics show short positioning in JPY.

Hence,  further escalation of the North Korean tension could  extend the  JPY  strength.  Meanwhile, emergence of realistic risk of a military conflict could lead to rising JPY selling pressure.

The  North Korea  risk  is different from a natural disaster (2011 quake). Japans national security  environment  is likely to deteriorate rapidly. Sentiment among Japanese  who have not experienced any military conflict in the post WWII era  could turn even more negative than at the time of the 2011 earthquake.

So,  while we are not certain when  or  if the situation should improve or worsen,  one-sided JPY strength pressure  may not last forever  or extend much beyond this years high (108s),” BofAML argues.  

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