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USD/JPY: looking for a decline - Scotiabank

FXStreet (Guatemala) - Eric Theoret, CFA, CMT FX Strategist at Scotiabank explained that JPY is up a modestly, strengthening for a second consecutive session with the bulk of its Asian session gains coinciding with the release of China’s better-than-feared inflation data.

Key Quotes:

"The moderation in concern about the path for China has served to further soften expectations for an acceleration of BoJ stimulus. However, central bank policy divergence is expected to remain a key driver for JPY over the medium term.

We note that USD/JPY has made a clear break with the 2Y U.S.-Japan yield spread—presenting some risk for JPY as we consider the potential for a realignment. Meanwhile, options prices suggest a growing rise in demand for protection against downside risk in USD/JPY (JPY gains), underscoring the two offsetting forces (fundamentals and sentiment) that have served to constrain movement in USD/JPY for over a month (bottom chart).

We are biased to a potential decline in USD/JPY as we consider the leading signal provided in the risk reversals ahead of the October rally in USD/JPY."

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