J.P.Morgan Recommend Long JPY Vs. USD & EUR Basket

Friday saw J.P.Morgan note that "the prospect of a material change to the BoJ's YCC policy, potentially on the order of 30-50bps more flexibility, is a striking and unexpected development this week. We have long advocated a structurally-stronger JPY predicated first and foremost on real yield compression, where JPY is now close to best-in-class. Such a change (assuming unchanged inflation expectations) would drive JPY's real yield advantage materially higher, at a time when the currency is already cheap to both USD and EUR on those metrics. Moreover, we note the sharply-decelerating pace of unhedged capital outflows which should be less of an impediment to FX conforming to real rate levels. Selling USD/JPY on this basis allows for a degree of insulation should U.S. Tsy yields move substantially higher, given that JGB yields will now be able to move partially in sympathy. But we also sell EUR/JPY to partially mute the overall USD influence, which equates to putting more reliance on the structural real rate compression driver. Indeed, while we generally accept that USD should firm against low-yielders, strong structural forces like a break higher in JPY real rates could still be a sufficient-enough catalysts to drive USD/JPY lower. A basket trade is therefore preferable in this instance, in our view. Buy JPY vs 50:50 basket of USD, EUR in cash. Stop loss of 2.25%. Spot ref: Y103.83 and Y126.34."