The recent move up in USDJPY has been characterised by a state of denial as everybody believed it should be faded as a “risk trade”
As a consequence, as equities kept falling, everybody waited for USDJPY to follow
Belief was that the most recent fall in Equities was on the back of us moving into the “Economic” dynamic rather than the financial dynamic
What it means is that Japan was a hedge against financial distress (Less leveraged,stronger banks etc) but not economic distress
As economic distress Globally came to the forefront and in Japan in particular (Horrible GDP numbers, collapsing exports etc) the JPY suffered this stress and USDJPY went higher.
Now with Equities showing signs of respite/relief people are more comfortable with the JPY weakness continuing….WRONG
If Equities falling in this last leg were economic concerns then a bounce should suggest to some people an alleviation of those concerns.
While this view may be misguided that perceived allevaition should be USD negative and counter intuitively JPY positive
While some doubt this is a lasting development - it could create a surprising short-term and possibly deep fall in USDJPY
Watch out if it breaks below 97.90 in USDJPY. If we do we think we could see 96.50 or lower in a heartbeat. History shows that USDJPY has the capability for really fast downside moves. We would not be surprised if this move takes place in the next 24 hours.
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