Continuing to target 104 for USD/JPY at the end of 2018, sell GBP/JPY - TDS

Analysts at TD Securities explained that now that the Bank of Japan has demonstrated a willingness to allow for more yield curve control (YCC) flexibility, policy should become more fluid in the coming months. 

Key Quotes:

"We think the BOJ could introduce additional flexibility as soon as Q1-2019 insofar as the output gap continues to remain decisively positive and they can credibly defend the 20bps upper bound."

"We think the JPY's return profile should be asymmetrically skewed to appreciation over the medium-term. Allowing for more flexibility suggests that rate differentials will become more balanced. Though this will be slow, it does suggest that global capital flows will shift back in favour of inflows for Japan."

"We continue to target 104 for USD/JPY at the end of 2018. The USD outlook is particularly uncertain right now given the shifting geopolitical landscape. Instead, we think GBP may be a better funding currency right now for JPY longs as the BoE is sidelined and Brexit risks are returning to the market's attention."

"We think simple 6M GBP/JPY put spreads offer an attractive risk/reward way to position for the simultaneous risks of a more hawkish BoJ and Hard Brexit. A 22-/8-delta put spread currently offers an (indicative) total potential net payout of 10:1."