USDJPY: Topside move coming – TDS

Analysts at TD Securities suggest that against the backdrop where the USD may get a carry boost, they are favoring a tactical USDJPY topside move.

Key Quotes

“With our expectation that the BOJ should remain sidelined, the yen should be more of a function of the Fed and 10yr Treasury yields. Here, we expect a modest sell-off as the Fed is expected to just deliver 25bp of cuts (even the market continues to trade at about 30bps) and push back on large scale easing anytime soon.”

“A move should be tactical in nature and measured however. 109 in USDJPY marks the first notable technical barrier for the pair and soft-form neckline reverse head and shoulders established from the May 31 breakdown. A convincing break above this should put 110 as the next topside attractor. We are inclined to view this as a sufficient tactical move, but we note that failure to hold below 110 would have us reconsider a 112 extension risk.”

“The risk of an enhancement of forward guidance / JGB flexibility on the margin tilt to a weaker yen, as does emphasis or concern over a strong yen. We do not see the BOJ endorsing a yentervention type of a stance, as that would trigger a political war of words with the US administration over currency dynamics taht Japan will be keen to avoid. Rather, we think benign – and typical – assurances that officials will be watching yen performance should reinforce that the BOJ want to avoid a strong yen as the Fed embarks on an easier path. Trade details: enter long at 108.60, target 110, stop at 107.50.”