[AndrewWoo]

The JPY rallied strongly against all currencies yesterday. However, we believe this rapid appreciation of JPY will be temporary. Part of the reason for the size of the move appears to have been option barriers having been breached. However, while this may have amplified the move down in USD/JPY and the strength on the day of the JPY, it does not negate the underlying point that the JPY has strengthened markedly over recent weeks. This has led the JPY TWI to now being more than two standard deviations above its 10-year average. The previous two occasions in the past 10 years that this has been as high were immediately following the Lehman Bankruptcy and the period of liquidation, including the rapid unwinding of carry trades in late 2008/early 2009. While there has been an increase in nervousness about prospects for the global economy, we are not back in that world. While both the TFX and CFTC data suggest that investors have been selling the JPY, neither suggest that the positioning is at elevated levels, with the exception of AUD/JPY. A strengthening JPY is not what the Japanese economy needs given the weakness of growth and the prospect of negative inflation for a considerable period ahead, so the move increases the probability of verbal intervention by Japanese government officials. Japanese officials have already started making comments on FX. We therefore think that the move in USD/JPY below 94 will be temporary, though we acknowledge that an improvement in investor confidence is likely necessary for USD/JPY to move back into a 94-99 range. The Q2 US earnings reporting season, which picks up steam next week, will be important.