Fundamentals in Japan still support a weaker JPY. Yield differentials are one of the most
important drivers of currencies and, as the top chart shows, this shows that USDJPY is
becoming stretched to the downside.

Also, as we highlighted in our Themes for 2017, the BoJ’s Yield Curve Control policy is an
important change in Japanese monetary policy that should keep gains in the JPY capped.
The yield curve has maintained a positive bias since late last year (bottom-left chart), which is positive for the banks. Profitable banks are likely to lend more at home and abroad which is yen negative.

However, the yen could see some further upside in the short term. Positioning, using CoT
data, remains quite net short, with the yen the instrument with the second highest short
positioning (relative to open interest, bottom-right chart), which leaves the yen vulnerable to short covering. We maintain our bias for a weaker yen and are looking for opportunities to buy USDJPY. (Click on charts to enlarge.)

(from our Weekly of March 28th 2017)

Source: Bloomberg, Macrobond and Variant Perception