Greece's day of reckoning only the start

Further JPY-weakness may be in store

The JPY has undergone a distinct adjustment lower versus other major currencies over the past week following the BOJ’s decision to initiate another round of QE and establish an inflation target of +1.0% (latest CPI was -0.3%), suggesting more QE will be needed in the future. Together with Japan’s trade surplus evaporating into a deficit (January trade data due out on Monday morning in Tokyo; adjusted trade deficit of –JPY 850 bio expected), we think there is scope for further JPY weakness in the weeks ahead. Anecdotal reports also suggest Japanese investors started to actively reduce their portfolio hedges, leading them to buy foreign FX and sell JPY, adding yet another flow to JPY-selling pressure.
USD/JPY and many of the JPY-crosses have reached 3-month highs and are testing key resistance levels, such as USD/JPY 79.50/80.00 and EUR/JPY 104.50/105.00. While we think there is further upside in store, we would avoid getting long at these levels and prefer to wait for a pullback to pursue long entries (selling JPY), ideally around 78.00/50 in USD/JPY and 102.70/103.20 in EUR/JPY. Breaks above the resistance zones mentioned above may see JPY-pairs move directly higher in this adjustment. Potential turmoil emanating from Europe next week could provide the desired pullback, if investors turn back to the JPY and the USD on safe haven demand.

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