The recent bout of global risk aversion stemming from a weakening global macro outlook has raised cross-asset volatility, leaving investors searching for havens. Uncertainty regarding the prospects of global growth, not just the trajectory of China and other EMs, has led to increased cross-asset volatility (Figure 1) as conviction is low and investors seek to cut risk exposures and flee to traditional safe havens. Amid increased market turbulence, rates markets have pushed back expectations for Fed hikes and are now pricing additional easing by global central banks in the coming quarters.We expect additional easing by the ECB and BoJ in March.
In this environment, we expect the JPY to further outperform and have revised down sharply our USDJPY forecasts even in the face of further BoJ easing and possible FX intervention.We think that the fear of broader global risks now appears to outweigh worries about further BoJ policy easing. Given concerns on limits of the policy arsenal at the BoJ (and other central banks like the Riksbank, for example; A larger-than-expected Riksbank cut, 11 February 2016), and delay in Fed hike expectations, USDJPY appears prone to further downside risk without any clear catalyst for an improvement in global market sentiment.We now look for USDJPY at 100 through Q1-Q3 and 95 by year-end. Long JPY positions also act as a meaningful hedge to equity price gyrations in the context of FX overlay portfolios.
Trade for the week ahead: Short EURJPY.
We think that the fear of broader global risks now appears to outweigh worries about further BoJ policy easing. Given concerns on limits of the policy arsenal at the BoJ and rising euro-centric risks,we recommend initiating short EURJPY positions, preferably via options ahead of the March and June ECB meetings, despite acknowledging the recent uptick in the implied volatility of JPY crosses.
Technically, our bearish view for EURJPY was encouraged by the break below 126.00, near the 2015 lows.Lack of upside traction following the January uptick points to further weakness in the coming weeks.We are looking for a move below support in the 125.00 area to open our targets near 122.00 and then lower towards 118.75
