Citi Warns Time To Get Defensive On USDJPY

With today's shenanigans in USDJPY focusing everyone's attention on the nation's collapsing currency, Citi's FX Technicals group suggests it could perhaps be time to fade the trend and fight the consensus in the near-term.

 

 

There are a few reasons why it is time to get a little defensive on USDJPY in the near term.

– The low to high move so far is very similar to that seen in 1995-1997 before we saw a squeeze lower. We would not expect a squeeze of that magnitude (17 big figures) as this is not a trend that has the same magnitude of participation (particularly domestic) and we do not have the same leveraged yield structure and mature Fed tightening cycle as we had then.

 

– As we approached December 2013 and traded above 105 (105.44 on 02 January) we then saw a squeeze to 100.76.

 

– Prior to that we peaked just shy of 100 (99.95 on 11 April 2013) before we saw a squeeze to 95.80

 

– We also trade just above 110 (110.09 on 01 October) before a squeeze to 105.23.

 

– At 115 we pretty much “bypassed” the squeeze going only from 115.59 to 113.86- but we did squeeze sharply off every other “5 big figure” increment since 100

So a squeeze in the near future (Dec into early January) back towards 115 again does not look unreasonable.

In addition we are as overbought on the monthly chart as we were when we saw that 1997 squeeze as well as another squeeze in December 2005. We also saw some minor squeezes from a similar price dynamic in 2001-2002

Bottom line: we still like the medium term USDJPY trade. We still think 130-140 is possible in the next 12-18 months. We still think a change in Fed policy will contribute to this. However, for now, we think that levels closer to 115 could provide a buying opportunity in the weeks ahead.

 

Source: Citi