MI2 for C8 – The FX Year Ahead – Turning Japanese – Feb 2024

Japan is likely to come into increasing focus this year. With bond yields now being allowed to rise as the BoJ’s Yield Curve Control experiment comes to an end, the BoJ’s roadmap to ending NIRP (if things go to plan), the multi-decade underperformance of Japanese equities still fresh in asset allocators’ minds (despite some promising upside momentum) and a chronically weak currency, (especially on a real effective, inflation-adjusted trade-weighted basis), there is plenty of potential for disruption.

As our focus here is foreign exchange, volatility adjusted carry and positioning metrics will be key components of our strategy approach. Our research will concentrate on a range of macro variables to assist in developing our expectations of the timing and scale of policy moves (both BoJ and other G7 Central banks). In combination, these will provide the parameters and catalysts for our strategy implementation.

In conclusion, MI2 remains sidelined for the time being in terms of major currency trends. Patience and range trading remains the order of the day. Nevertheless, we are very much in the unstable equilibrium camp and anticipate the likelihood of market disruption to be higher than consensus expectations. How to balance these two ostensibly incompatible insights will determine how best to take advantage of the opportunities that 2024 promises. We will continue to convey our thoughts to you as the year progresses.

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