As investors, we are always on the lookout for opportunities to profit from market inefficiencies. In today’s blog post, we will be discussing a potential short play on the USDJPY pair, based on a fundamental analysis of the current market dynamics.

Firstly, let’s take a look at the nominal and real spread differential between the US and Japanese interest rates. As Jefferies notes, this spread has been reducing sharply over time, indicating that the BoJ is in a hiking cycle while the Fed (which we believe) is in an easing cycle. This fundamental discrepancy in monetary policy could lead to a strengthening of the JPY against the USD.

Furthermore, we believe that the JPY should benefit from the USD diversification trade that started with the tariff wars and is likely to extend this year with more uncertainty in the US policy framework. As events since the start of the year have shown, Trump policies have become more interventionist, which should further help the US diversification trade. Our view remains that this trade should be relative to precious metals and vs Asian currencies, with the JPY being a prime beneficiary.

It’s not just the JPY, however, that we believe will strengthen against the USD. Other Asian currencies such as KRW, TWD, and SGD are also likely to benefit from this trend. So why are these currencies set to rise? Simply put, it’s because they are less exposed to the uncertainties of the US policy framework than the USD is.