Japanese Yen: Yen turning corner case builds – Societe Generale

Societe Generale strategists highlight heavy USD/JPY turnover as the pair slid below its 200-day moving average, with leveraged accounts forced to cover shorts. They argue that potential Bank of Japan (BoJ) tightening cadence and bond repatriation flows ahead of fiscal year-end support a more constructive Japanese Yen outlook, though conviction hinges on Federal Reserve policy and rate spread dynamics.

Heavy flows as Yen sentiment shifts

"USD/JPY struggled to overcome the interim hurdle at 160.70/161, representing the 50-DMA, earlier this week and has since experienced a sharp pullback. It is worth noting that the pair could be forming the right shoulder of a head and shoulders pattern, which generally signals potential downside. Should a rebound develop, the MA near 160.70/161 may remain a key hurdle. The next crucial support is located at the pattern's neckline near 155. A break below this could trigger a deeper downtrend."

"An estimated $30bn was traded yesterday during the down leg in USD/JPY from above 100dma to below the 200dma and follow through selling was observed in Asia overnight adding more daylight below the psychological threshold which is forcing leveraged accounts to play catch up and cover short positions."

"With the BoJ potentially stepping up the cadence of tightening (not the increments), and bond repatriation flows being stepped up ahead of FY end (recuring seasonal pattern), there is a case to believe that the Yen may be just about to turn a corner. Conviction will partly depend on what the Fed does next, and whether bond spreads can back up the move in spot."

"That was the case yesterday when 2y UST/JGB narrowed by 9bp to 250bp but momentum stalled overnight, questioning the scope for sustained Yen appreciation. We’ve been down this track before, most notably in early August when the impact of the coordinated intervention proved short-lived and weak long Yen/short dollar hands eventually lost out with dips bought and recurring Yen weakness causing frustration."

"A downside surprise for NFP tomorrow (whisper down to 40k after ADP) and/or CPI next week would boost conviction that the Yen is headed for a decent run. Market participants also pointed to model-driven selling and position adjustment by leveraged accounts following hawkish comments by BoJ board member Takata. Sources this morning poured cold water on the likelihood of more draconian hikes of 50bp, triggering a minor reversal and squeeze up to 157 from the intra-day low of 156.36."