IMM positioning data released on Friday revealed that investors slashed their bearish JPY bets, sending non-commercial positioning to the 44th percentile - the least bearish level since October 2012. From a historical perspective, last week's move was very aggressive as it was the largest single week's net short covering in 18 months. While positioning suggests reduced investor belief in a higher USD/JPY, we still fundamentally expect the cross to move higher on the relative monetary policy differential.
Although recent US data has surprised to the downside - partly due to temporary weather effects - we still expect the Fed to hike rates in September. Historically, this has lifted USD rates in the months prior to lift-off, which we again expect to boost the USD in the coming months. In addition, the Bank of Japan's monetary policy is unprecedentedly aggressive, which will continue to be a JPY negative in our view even in our base case scenario where monetary policy is not eased further. We target USD/JPY at 125 in 3M.
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