Lat week, Credit Suisse advised clients to consider tactical JPY longs (short EUR/JPY) in order to position for risk-intolerant markets. With the ongoing risk-off mode, CS maintains this view advising to broaden out with a tactical short AUD/JPY position. The following are the key points in CS' rationale behind this view.
- The last several trading sessions have seen concerns over global growth grow louder, contributing to a risk-off tone in the market – causing VIX to spike and calling into question the timing of the Fed’s removal of monetary accommodation
- Government yield spreads are also consistent with a strong yen in the near term. While the relationship between USDJPY and 5-year government rate differentials has been volatile in recent years, to the extent that Vice Chair Fischer’s comments and the global macro backdrop weigh on US yields, we would expect this to exert downward pressure on USDJPY .
- Finally, though considerable text has already been dedicated to the sharp decline in euro area inflation expectations – having broken through decade lows – additional ECB action and EUR weakness appears likely
"Taken together, these factors reinforce our call to sell EURJPY – but to also broaden out to AUDJPY shorts – as a sustained period of equity market volatility and risk-off behavior could result in broad-based yen outperformance," CS concoludes.
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