This week stands out and currently looks significantly overbought. We expect further weakening of JPY over the coming 6-12 months and we still prefer to buy on dips. However, there are several factors suggesting that the recent spike in currently looks excessive and indicate that a short-term correction could be imminent. Hence, we suggest utilizing a possible correction lower in by buying a 1M 82.50 KI call option with barrier at 81.75.
What stands out Short-term model and spot misalignments
Looking at the signals from our short-term financial models, JPY and CZK stand out. Both currencies have depreciated considerably over the past weeks as the market has been pricing in a higher probability of further central bank easing. According to our short-term models is currently trading with the biggest misalignment (2.1 standard deviation above model estimate) and looks significantly overbought. and are also trading with significant misalignments versus models estimates, and we still recommend being long and , even though our models are unable to explain the current misalignments.
In particular, we see a strong case for a considerably weaker yen as an economic recession and the forthcoming general election in Japan have raised speculations of an increase of the BoJ’s inflation target from the current 1% to 3%. If a credible higher inflation target is introduced, it could prompt a structural shift in the underlying appreciation trend of recent decades and thus pave the way for a significant weakening of the yen.
However, there are several factors suggesting that the recent spike in currently looks excessive and indicates that a short-term correction could be imminent. First, , as mentioned earlier, is significantly overbought according to our short-term financial model. Second, the RSI index has reached levels above 70 (currently 79), which also implies that is overbought. Finally, investors are already net long , according to the latest IMM
data. Hence, there are many indications that the recent move higher has been a bit too fast. To Read the Entire Report Please Click on the pdf File Below.