This Week's FX Play: Short The GBP/JPY

AVOIDING CYPRUS AND THE FOMC – GBP/JPY THE PLAY
For those that wish to limit their risk appetite this week by avoiding the Cypriot crisis and FOMC, short GBP/JPY positions are arguably the best option.

GBP/USD recovered impressively last week, off from the March-12 low of 1.4837 as profit taking sparked the initial bounce back above 1.4900. Comments from Mervyn King on March 15, stating that the decline of the sterling had gone far enough providing further follow through to the retracement higher, reaching a top of 1.5174. Cable has been in a quandary ever since.

Looking forward, the UK government could possibly make calls for the Bank of England’s mandate to be changed this week as concerns linger that the central bank needs to enter into more aggressive policy in order to spur on growth. Governor King rejected any calls for changes in the BoE's commitment, however, with him leaving office in June, there could be a different landscape in the coming months. Ex Canadian central bank head Mark Carney takes over the top job at the Bank of England this July and he’s already expected to concentrate on growth with a range of flexible and, in some cases, bold policy. What is clear is that many have become fed up of this recovery that’s been promised but has never materialised. With the UK economy teetering on the edge of a triple dip recession, that mood is certainly heightening, with the UK government getting ever rosier cheeks. At some point something has to snap; this could come in the form of Chancellor Osborne pressing the BoE harder, or simply the BoE finally taking the necessary actions. On this evidence one could point to a softer sterling outlook.

Meanwhile, back in the land of Japan, the flurry of ultra aggressive easing comments from Prime Minister Shinzo Abe and incoming BoJ governor Kuroda appear to be having less and less effect, as an aura of “tell us something new” takes shape. Recent price action has indicated that market participants are aware of what’s to come but are ultimately over the hype. USD/JPY reached a high of 96.72 on the 11th March and has consistently struggled to hold the 96.00 region since, most notably dropping to 94.17 of late. Yesterday’s Cyprus debacle did see a flight to safe haven dollar buying providing a rally back to 95.70 but one wonders whether the trend back lower will continue once the dust has settled, with the problems in Europe simply providing a second bite at the apple.

With GBP/USD currently trading around 1.5120, slightly higher on the day from decent CPI and PPI data, coupled with USD/JPY trading around 95.40, this could be the right timing on the cross