In early April, Bank of America Merrill Lynch FX Strategy Research argued that USD/JPY’s potential technical dip below 110 would not be sustainable.
In that regard, BofAML notes that following this call, USD/JPY subsequently breached 110, but bounced off the low 108s, above the 50% retracement (107.87) of the post-US election rally before succeeded in closing the month above the monthly ichimoku cloud (109.0) and crawling back above the weekly ichimoku cloud (111.39).
What’s next for USD/JPY? Firmer downside, vulnerable upside.
“The question now is whether USD/JPY will trend downward again, trade in a range, or recover a rising trend…While a widespread decline in market volatility may suggest a range market with marginal support for yen-carry trades for now, we believe USD/JPYs downside is firmer, and upside more vulnerable,” BofAML argues.
What’ the trade? Long EUR/JPY and Long NZD/JPY.
“USD/JPY is now trendless and declines in the US and RS indicators suggest light positioning in JPY short…We like EUR/JPY on monetary policy divergence, and NZD/JPY based on positional argument,” BofAML adds.
USD/JPY is trading circa 113 as of writing.
Source: Bank of America Merrill Lynch Rates and Currencies Research
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