FxWirePro: US-China trade tensions stimulate long hedges of JPY appreciation

During the past month, JPY has been a sole outperformer. The JPY appreciation was notable in the latter half of the month, mainly due to deterioration in risk sentiments as concerns for an escalation of trade wars between the US and China strengthened. USDJPY fell below 110-level on May 8thfor the first time since late March this year. 

Given the JPY appreciation with unexpected deleveraging and some other developments discussed in the following, we are making modest changes to our USDJPY forecast.

We are revising down our 2Q target of USDJPY from 114 to 113 and pushing back an expected peak of the pair to Q3 at 114.

As mentioned above, there have been some developments for the past month. The most important event was that US-China relationship deteriorated with a possible raise of US tariffs on $200bn worth of imports from China to 25% from 10%, and this led to the deterioration in risk sentiments. This was a shock to the markets as shared consensus was that their talks were making progress and they were not too far from an agreement. As a result, JPY appreciated. The sudden change in the US attitude towards China and its stronger protectionist stance suggests risks with which the US might go hard on Japan in their trade talks. The looming risks are likely to weigh on USDJPY for the next coming months. 

Hence, on hedging grounds, we advocate shorting USDJPY futures contracts of mid-month tenors as the underlying spot FX likely to target southwards below 107.318 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index was at -26 (which is mildly bearish), while hourly JPY spot index was at -32 (mildly bearish) at 05:51 GMT. 

For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex