The JPY has seen a huge sell-off but we expect a reversal to the upside and a major rally. The logic of this view is below and a summary of the fundamentals, sentiment, and key technical levels to watch is below.
The market has sold the Yen on its low yield and speculators have now built up a major short Yen position which is the biggest in decades and points to a corrective break to correct its oversold condition.
But there is a bullish fundamental that could come into play which is risk aversion and a sell-off in stocks.
The US and global economy are slowing and we could get a recession and a stock market sell-off which is bullish for the JPY.
Some reasons below from Goldman Sachs on why they see the JPY as the attractive recession stock market weakness hedge:
1. Its typical correlations with real yields and equity prices
2. GS fair value estimates that the JPY is more than 25% undervalued versus the USD
3. Changing conditions in the Japanese economy it’s actually starting to improve
We saw some of this recession narrative play out in May when the JPY gained and SPX sold off quickly…
The SP500 still remains overvalued and the fundamentals are bearish. We have the Fed hiking rates into an economy that’s slowing and Fed stimulus is being withdrawn.
In fact, Fed stimulus was responsible for 90% of the rally and it’s now gone while stocks still remain at valuations at the height of the tech bubble bust.
The major currency which is heavily correlated with SP500 strength and weakness is the AUD and we view it as a good risk to reward sell.
Many in the market see more Yen weakness and here is a typical comment:
“The BoJ’s contrasting stance with other major central banks leaves the yen vulnerable to further weakness in the near-term.” (MUFG)
The sell-off is too severe and a correction is likely – when the market starts to see a trade as a “one way bet” you have a bullish extreme and very often get a trend change and we think the Yen will turn in the coming week.
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Technical Analysis
On the chart below we hit new daily highs and have come back down from them – there is resistance on the monthly chart at the 97.20 level and we expect this level to hold.
We view the AUD as a sell for a return to first-level support but if we get risk off we could run down to level 2.
If we do break lower we expect strong follow-through selling as the large number of speculators who are long are taken out on stop.
