Bank of America Merrill Lynch FX Strategy Research reiterated its view that JPY strength may be overdone and that the USD/JPY's medium-term uptrend has not ended despite the recent technical sell off through 110 where BofAML stopped out of its long recommendation.
In that regard, BofAML argues that global risk events may not fully explain the extent of JPY strength, and flow dynamics could have been behind the JPY strength.
"There is a seasonality of increased foreign bond purchases by insurance accounts during the early part of Japanese fiscal year. This year, we observe (1) rising yields in the JGB's super-long sector, but still at a relatively low level; (2) lower FX hedge cost; and (3) higher US yields, and (4) a lower USD/JPY," BofAML notes.
For now, BofAML notes that USD/JPY around current levels may not attract strong demand, but believes the USD demand will increase in the next few months once we go through April full of risk events or if we get renewed optimism for the US tax reform.
"With new data from the balance of payment statistics, we argue the demand/supply balance of USD/JPY should be improving especially after an eventful April," BofAML argues.
USD/JPY is trdaing circa 109.10 as of writing.
Source: Bank of America Merrill Lynch Rates and Currencies ResearchOriginal Article
