The Week Ahead: Friday 05th July 2019 – Currency Point: In safety we trust

July 5, 2019

By Evan Lucas,

Currency Point – In safety we trust

Trade idea: Short GBP/JPY

Entry: Above ¥135, Stop: ¥138.00, Target: ¥128

Have been advocating for long JPY positions for a little while now and see an opportunity building in GBP/JPY. The GBP has two very interesting dynamics going against it.

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First is UK data which is continuing to deteriorate. Best example of this was the release of its ‘economic surprise’ index which collapsed to its lowest read since August 2012 (just be for Mario Draghi’s ‘whatever it takes’ speech). The slowdown in economic activity in the UK has seen the BoE turning decidedly dovish and has caused Mark Carney to elude to possible cuts to UK official interest rates.

The second dynamic is geo-political, the Conservative Party are due to nominate their new preferred leader in the coming weeks. Boris Johnson is favourite and has promised to
‘finalise’ Brexit even if that is a no-deal. Volatility in the GBP is clearly building.

The other side of the equation is fairly self-explanatory and my reasoning for looking at JPY longs is based on the following reasons: global economic data is softening and fast, the outlook risk assets is weakening while the probability of lower US rates and a steeper yield curve are rising all adding further pressures and will see flows to safe haven assets.

Trade risks:
– Rebound in global economics
– BoE moving back to a neutral stance
– UK political uncertainty resolving itself with a minimal amount of fuss.

Trade Idea: (Adding to) Short USD/JPY
Entry: Add to position or at or above ¥107.8, Stop: ¥108.9, Target: ¥101

Want to highlight last week’s USD/JPY call, the trade is working in our favour and actually want to add to the position. There is still plenty of opportunity here with the pair shifting back up to ¥107.7 will look to enter all the way up to ¥107.9.

The USD in my opinion actually looks very weak at this point in the cycle and even the Non- Farm Payroll won’t change that view as the Federal Reserve is looming large. The cuts are coming it’s just a question of when.

By Evan Lucas,