Resulting in position unwinding currently
- Speculators had been aggressively buying JPY even amid the environment that would naturally work to weaken the currency
- Such as widening of US-Japan interest rate differentials and Japan's narrowing trade surpluses
- What we are seeing now is a reversal of that move
- JPY buying was purely motivated by speculation as supply/demand is now probably tilting in favour of JPY selling
- While concerns over geopolitical risks weigh on sentiment, market is still in the process of wanting to test the dollar's rebound
Commentary by Daiwa Securities. While all fairly valid points - especially since USD/JPY looks to have broken the 'lower highs, lower lows' pattern on the daily chart - there could be a bigger macro theme at play for the pair other than geopolitical risks and equities.
And it's a simple one, flows. The rise in Libor has increased hedging costs when purchasing US securities, and that has resulted in continued rotation out of US assets by Japanese investors as was highlighted here.
That could put a cap on any upside in USD/JPY if real money flows are still not supportive of USD buying.
