USD/JPY - downside risk is as big as ever - Societe Generale

Despite the slide in the US dollar, the greenback is still being viewed by most as an 'overvalued currency', while the Euro is perceived to be cheap. However, "the standout cheap major currency is the one which is de-coupling from bond yields, and which would be the big winner of higher yields triggered a return of risk aversion", says Kit Juckes from Societe Generale. 

The Japanese Yen seems to fit the bill to the T. The rebound in the USD/JPY pair from near 110.15 (61.8% Fib R of Sep-No rally) ran out of steam yesterday at a high of 113.39. Currently, the pair is fast losing altitude, trading 0.50 percent lower at 110.50 levels even though the US 10-year treasury yield hit a 40-month high of 2.642 percent. 

The correlation between USD/JPY and yields has broken down and the bid tone around JPY seems to have strengthened on fears the (potential) government shutdown could destabilize the risk assets. 

Juckes says, "US yields are up above the 2017 high as concern about a partial government shutdown adds to pressure from strong growth. So far, risk sentiment hasn't been hit."  However, if markets do turn risk-averse (due to rising yields and/or government shutdown), the Japanese Yen is likely to spike. 

Juckes sums up the whole situation by saying - "the upside room in USD/JPY is shrinking and the downside risk is as big as ever (fair value is around 100)."