TS Lombard strategist Daniel Von Ahlen has flagged what he considers an appealing risk-reward setup for shorting USD/JPY, pointing to a cluster of positioning dynamics and macroeconomic expectations that, in his view, make the pair vulnerable to a stronger yen.
Von Ahlen argued that a combination of factors - including crowded market positioning and expectations that the Bank of Japan will raise interest rates following a hawkish hold this month - underpin the trade thesis. In his note he wrote:
"A stronger domestic macro environment, the US-Iran endgame (and, with it, lower energy prices), the risk of a US growth soft patch in Q2 and Q3, attractive valuations, the recent upward momentum in JPY rates and a meaningful buildup of short positions all suggest attractive risk-reward in shorting USD/JPY,"
The strategist highlighted the role of Japan's fiscal stance, saying that looser fiscal policy is providing a boost to the domestic economy and supports the view that Bank of Japan policy normalization remains on track. That dynamic, combined with upward momentum in yen rates, feeds into the case for a stronger currency.
On positioning, Von Ahlen cited commitment of traders data and the firm’s proprietary tactical JPY positioning indicator to show that market participants are notably short the yen. He wrote:
"This adds to our conviction, as we struggle to see the case for JPY shorts to be ramped up further,"
In addition to outlining the drivers that tilt the odds toward a stronger yen, Von Ahlen also flagged a prominent risk to the call. He identified a recent softening of inflation momentum as a factor that could undermine the trade.
Market implications
- FX markets: Elevated short positioning and rate expectations are central to potential yen appreciation.
- Fixed income: Upward momentum in JPY rates is cited as a contributor to the trade rationale.
- Energy sector: Von Ahlen notes the US-Iran endgame and the prospect of lower energy prices as part of the macro backdrop influencing currencies.
Von Ahlen’s note lays out a scenario where multiple macro forces and market positioning converge to create a favorable environment for shorting USD/JPY, while explicitly acknowledging inflation momentum as a material headwind to that view.