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First a quick rundown of my top trade in Q2, short GBPUSD looking for 1.2750-1.2800 from around 1.3200. The reason for this view is that market prices are too aggressive for monetary tightening compared to reluctant Bank of England rate hikers. As of today, GBP/USD is on track for its worst quarterly performance since the 2016 Brexit referendum, having also fallen below the psychological level of 1.20. There is a saying that my goals are not ambitious enough.
Looking ahead to the third quarter, I am bullish on the yen. Two reasons: U.S. bond yields and commodities, especially oil prices, are off their highs. These are the main reasons why the yen has been one of the worst performing currencies this year. Since these two factors are correcting now, the yen will correct as well, as shown in the chart below.
USD/JPY (Black) vs US 10Y YieldUSD/JPY (Black) vs Brent Crude Oil
My view on USD/JPY is 130 above 140, although this view will need to be reassessed if bond yields and oil prices return to higher levels. Of course, the risk for USD/JPY is that the Bank of Japan (BoJ) remains a policy outlier. The Bank of Japan doubled down on yield curve control after buying a record amount of bonds in a week, while central banks around the world are aggressively tightening monetary policy. Moreover, the Bank of Japan acted even as Japanese officials questioned the benefits of extreme currency weakness.
Levels to Watch
Bottoms: 131.50 (BoJ reaction low), 130.00 (psychological/integer), 126.36 (low since May 2022)
Upside: 135.00-20 (2002 peak), 136.71 (2022 peak)
Bias: USD/JPY fell from 1.3600, targeting 131.55, if oil and yields return to highs, USD/JPY breaks 138.00, if oil and yields return to highs, the view will be wrong.
USD/JPY Chart: Daily Time Frame
Elsewhere, a recent spate of weak survey data in the form of U.S. and euro zone PMIs has prompted markets to increase the likelihood of a recession, especially in Europe. If activity data shows a sharp pullback, an aggressive repricing of recession risks should weigh on the yen, providing a good hedge in this environment. This is particularly evident in the JPY crossovers of commodities such as AUD/JPY, where AUD/JPY is likely to break below 90.00.
AUD/JPY
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