Risks on the USD/JPY pair are titled to the downside, according to analysts at MUFG Bank. They see the pair trading between 106.00 and 112.00 over the next weeks.  

Key Quotes:

“JPY positioning according to the weekly IMM data has become extreme. Based on z-score analysis covering a 2-year window, the current short position amongst Leveraged Funds and Asset Managers & Institutional Investors is close to 2 standard deviations from the average – the last time this happened was back in November 2015. That marked a point when USD/JPY peaked at levels over 120.00 before heading sharply lower in 2016. We are not suggesting that scale of rally for the JPY now (above 120 to 100) but more that the current level of shorts is at an historical extreme and if risk aversion was to intensify, we could well see a sharp correction lower in USD/JPY.”

“More challenging financial market conditions on the back of a worsening economic outlook also brings with it the limited monetary policy options available to the BoJ that tends to result in inflation expectations remaining far more muted in Japan relative to the rest of the world.”

“So we take are taking a bearish view for USD/JPY over the short-term. The primary driver of any move will inevitably be global risk conditions rather than domestic developments. Even if there is no notable equity market correction, the sharp move lower in UST bond yields still leaves USD/JPY vulnerable to a downside correction as one key catalyst for the move higher in USD/JPY reverses. The 10-year UST bond yield (1.28%) is at levels last seen in February when USD/JPY was trading below 106.00.”