J.P.Morgan: Go Long USD/JPY

Late Friday saw J.P.Morgan note that “while the risk backdrop remains far from certain for the yen (U.S. equities and Russia/Ukraine the obvious wildcards), messaging from Fed Chair Powell adds to our conviction that the impulse from higher U.S. rates on the dollar and by extension on USD/JPY has further to run - in all likelihood a lot further. It is true that correlations between yield differentials and USD/JPY have been less clean so far this year, and we would be hesitant in forecasting a trend extension of last year’s price action - as we pointed out last week, the relationship between OIS-priced Fed hikes and USD/JPY has softened after a near-linear relationship through 2021. But that should not prevent USD/JPY from making fresh highs against the backdrop of sustained upside to U.S. yields.”

• “Of course, the tactical risk to the trade remains USD/JPY’s re-discovery of its beta to risk. The challenge as we see it would be more from a Ukraine/oil-induced collapse in risk, and not so much a continued bleed in U.S. equities because of U.S. rates pushing higher. USD/JPY’s performance versus oil under risk-off regimes has not been particularly clean over the past decade or two (the beta was actually negative on average over the past decade; i.e., the yen’s performance was more a function of its safe haven credentials, less a reflection of its oil importer status). But ultimately higher oil should be bearish for the yen: there is around a 1-quarter lag in terms of the oil price impact feeding through to Japan’s trade balance, suggesting that even if the initial knee-jerk from a surge in oil and collapse in risk is USD/JPY lower, the eventual impact will be yen-negative.”
• They recommended entering a long USD/JPY position at Y115.24, with a stop at Y112.94.