Brandt's Biggest FX Bet Is Short EUR/JPY as Yen Strengthens
Peter Brandt's firm holds its largest futures and FX position in a short EUR/JPY trade as the yen gains on intervention and rate expectations.
USD/JPY fell nearly 1% dropping back below 158 as yen strengthens on BOJ rate hike expectations and yield pullback.
The major currency space is seeing a busy start to the day, with USD/JPY once again taking center stage. The pair dropped nearly 1% during overnight trading, with a surge of selling particularly before the US market open.
What is behind the decline in USD/JPY?
As noted yesterday, the move above the 160.00 level is a risky one for USD/JPY. It is currently a psychological game, and any effort to push too high too quickly could trigger intervention from Tokyo and/or Washington.
That is one factor. As also noted, rate checks from Tokyo could be taking place to warn traders. That type of signal may be amplifying the moves as the new day gets underway.
Beyond that, markets are increasingly expecting a BOJ rate hike in September, and bond yields are pulling back somewhat from their highs. This at least eases some pressure on the yen and keeps the dollar rally in check for now.
So, what lies ahead for USD/JPY?
The pair has now fallen back below the 158.00 mark to 157.60 levels on the day, down 0.7%. Looking at the broader picture:
The drop has not only eliminated support from the 200-day moving average (blue line), but also threatens to take out the lows from August 19-20 near the 158.00 region itself.
This puts sellers back in technical control of the pair. That opens up room for further downside, with next support only seen closer to 157.00.
For now, traders seem to be heeding the warning of another potential intervention. However, chasing a material break lower may be difficult.
First, traders have already fully priced in a BOJ rate hike for this month. Second, a big downside surprise from the US jobs report tomorrow is needed to trigger a material turnaround in the bond market. Even then, the latter is not guaranteed to persist.
So as long as the bond market continues to feel pressure and yields stay elevated, that will keep the yen under pressure. That is as long as the US-Iran conflict remains as it is.
In short, today's drop puts downside risks back in focus for USD/JPY as it breaks key technical support levels. However, there are still hurdles to sustain such momentum. The biggest one is getting the bond market to cooperate. That said, it is clear that any major upside momentum is also very limited by intervention risks, especially near 160.
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Peter Brandt's firm holds its largest futures and FX position in a short EUR/JPY trade as the yen gains on intervention and rate expectations.
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