Buy ‘cheap’ yen before big its big awakening in 2019, says SocGen

Bloomberg

It’s time to start loading up on “cheap” yen. Using options to bet on gains for Japan’s currency is a smart wager for 2019, according to Societe Generale. The yen reached its weakest since early October, before recovering as concern over China’s economy fuelled declines in global equities and eroded risk appetite.
The yen traded at 113.85 per dollar as New York trading got underway, rebounding from 114.09 earlier. It touched that level after the Federal Reserve left rates unchanged and stayed on course to hike next month. SocGen sees the greenback’s 2018 high of about 114.50 yen on Oct. 4 as an area of technical resistance.
“On top of being a good entry point to buy yen, we think investors should consider rising risks of a sharp yen bounce in the medium term,” Olivier Korber, a currency derivatives strategist at SocGen, said in a research note.
The call for a yen rally dovetails with the firm’s assessment, laid out in a separate research piece, which the dollar is “overvalued.” Although SocGen said it’s wary of selling the greenback too soon because the US economy is “still running hot,” the job market remains robust and the Fed is unlikely to signal a pause just yet, it sees a shift next year.
The result of the US midterm elections, which produced a divided Congress, “supports the idea that the best quarter for economic growth in the current cycle will prove to be Q3 2018, and it’s all downhill from here,” Kit Juckes, a global fixed-income strategist at SocGen, wrote separately.
“That suggests rates may peak next summer, at the same time as other, lagging central banks in Europe start raising rates.”
Morgan Stanley echoes the bullish bias towards yen. Strategists including Hans Redeker wrote in a research note that they see the makings of a temporary steepening of the US yield curve, which would signal a sell for both risk and dollar-yen. “The re-allocation of US investments into high-carry US money markets suggests it will not take much to start seeing USD declines, particularly if growth slows or risk appetite worsens again,” they wrote.
To wager on a stronger yen, Korber recommends buying an option structure known as an “appearing put spread,” expiring in a year. The structure includes the simultaneous pur- chase and sale of put options with different strike prices. One option has a feature that bets the yen won’t move below 100 per dollar over the lifetime of the structure.
Yen bulls will be looking for a pause in US rate hikes by the Fed, expectations of Bank of Japan tightening or more risk aversion, he said.
“The potential for higher US rates appears minimal compared with super low Japanese rates,” Korber wrote.