10 May 2013
Forex Flash: USD/JPY shows market asymmetry - Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale notes that the Yen’s (Abe-induced) fall from grace is a good example of market asymmetry playing out.
He notes that the simplest FX model of all reads USD/JPY = 74 + (17* 2yr yield). He writes, “Obviously unscientific in the extreme but that’s the point. It suggested, more or less, that unless 2yr yields could get back below 20bp, 77.4 was ‘the place’ to pitch a USD/JPY long, and that all you needed to do was.” He adds that US yields could not fall further, the yen could not appreciate further, all that was required was a catalyst for a move to start (and continue) in the other direction. He adds that the precise nature of the catalyst for a break higher wasn’t necessarily important. Juckes finishes by writing, “It is now, of course because with USD/JPY at 101, the old model says it is way too high and so we need to decide whether the model is dead and we’re in a new regime (we think we are).”
He notes that the simplest FX model of all reads USD/JPY = 74 + (17* 2yr yield). He writes, “Obviously unscientific in the extreme but that’s the point. It suggested, more or less, that unless 2yr yields could get back below 20bp, 77.4 was ‘the place’ to pitch a USD/JPY long, and that all you needed to do was.” He adds that US yields could not fall further, the yen could not appreciate further, all that was required was a catalyst for a move to start (and continue) in the other direction. He adds that the precise nature of the catalyst for a break higher wasn’t necessarily important. Juckes finishes by writing, “It is now, of course because with USD/JPY at 101, the old model says it is way too high and so we need to decide whether the model is dead and we’re in a new regime (we think we are).”