Tracking the risks of shorting the yen

Posted on July 25, 2016

A Japanese 10,000 yen banknote is arranged for a photograph in Tokyo, Japan, on Wednesday, July 22, 2015. The yen slipped 0.1 percent to 124.03 per dollar after better-than-expected data on U.S. housing and a continuing commodity rout boosted the greenback. Photographer: Kiyoshi Ota/Bloomberg©Bloomberg

RBC Capital Markets says go short the euro (EUR) against the yen (JPY).

In its latest trade suggestion, designed to last little more than a week, the bank says the market seems overly certain of more yen weakness in response to an expected stimulus by the Bank of Japan on Friday.

    “With 85 per cent of analysts expecting some form of easing, we see three JPY-positive risks,” said Adam Cole, head of G10 FX strategy at RBC.

    The most obvious is if the BoJ considers it too soon to make a move, wrongfooting traders.

    Second, “that easing is so widely expected that even a JPY80tn increase in [quantitative easing] and 10bp [interest rate] cut is seen as disappointing”.

    The third factor could prove particularly awkward for the market to digest.

    Imagine if the BoJ’s move further into negative interest rate territory reignites concerns about the financial sector and sparks renewed fears that central banks are losing control.

    A wholesale risk-off mood ensues — and then the yen is bought as a haven.

    In the euro’s side of the equation, Mr Cole thinks the common currency may weaken if eurozone inflation and GDP data due at the end of the week come in softer than expected and thus increase speculation on more action by the European Central Bank.

    RBC has set up a short EUR/JPY position at 116.50, with a target of 114.0 and a stop loss at 117.70.

    The big risk to the trade “is the possibility that the BoJ unveils something truly groundbreaking” that clobbers the yen.

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