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Mazen Issa, Senior FX Strategist at TD Securities explained that they  are selling USD/JPY in their FX Model Portfolio.

Key Quotes:

“We enter at spot ref of 112.50, stop at 113.80, targeting 110.

Rationale:

We recently noted that USDJPY has formed a top. Despite the back-up in 10yr Tsy yields, Japanese investor flows have favored equities in recent months, suggesting that the feedback loop from higher rates and equity markets will take precedence. Further, market-implied long-term Fed funds expectations have already converged to the Fed’s terminal rate. Without evidence of a fundamental catalysthowever, there is less impetus for the market to price in an overshoot, or for USDJPY for that matter. Moreover, our FV estimate suggests there is value to be had; our latest run suggests the pair should currently be trading sub-110.

Finally, US/China tensions appear poised to intensify, especially if the upcoming FX Treasury Report is used as a platform to label China as a currency manipulator.

Technicals: 100-dma near 111.23 is notable support, followed by the 200-dma near 109.79. Resistance located near 113.50 & 114.

Positioning: The JPY is one of the most short within the CTA community, suggesting that equity gyrations could easily lead to an aggressive short squeeze.”