Let’s examine USD/JPY in terms of 1) valuation, 2) carry, and 3) momentum.
1) http://fx.sauder.ubc.ca/PPP.html shows the yen to be overvalued relative to the dollar by about 30%.
2) There is no significant difference between USD and JPY overnight interest rates, so USD/JPY is basically carry-neutral. However, the Treasury and JGB yield curves indicate that the market expects the Fed to be much more aggressive than the Bank of Japan in hiking rates.
| Treasury | JGB | |
|---|---|---|
| 1-Year | 0.29% | 0.12% |
| 2-Year | 0.80% | 0.16% |
| 10-Year | 3.61% | 1.30% |
| 30-Year | 4.57% | 2.32% |
Long USD/JPY positions should have positive carry within a year or two.
3) Regarding momentum, the attached image tells the story: the dollar has been in a multi-year downtrend vs. the yen. It has been nearly three years since USD/JPY peaked at 124.09 (FRED daily closing values), so yen strengthening may have run its course.
USD/JPY
I am bullish on USD/JPY (bearish on yen). Right now, USD/JPY is at 88.72. I think we will see USD/JPY above 93 within six months. YCS (UltraShort Yen ProShares) closed at 19.31 today.
Recommendation: buy USD/JPY or YCS.