The volatility of the recent week, ahead of the Italian election, has pushed up the safety havens assets as investors turned more risk averse, in particular the JPY appreciated significantly. However, we noticed that the Nikkei 225 Index does not weaken consequently so the inverse relationship between the JPY and the index has broken during the recent turmoil. We believe that in the short run the inverse relationship will restart its course and so we forecast that either the Nikkei will decline or the JPY will depreciate or even both scenarios can happen. Moreover there are some fundamental reasons to believe that this can be the case such as the Japanese monetary policy and the intrinsic weakness of the Japanese stock market that recent rallied just because of the monetary policy.
We picked the NZD as a counterpart for the Yen because among its peers is the one that showed the hugest spike and because of its strong fundamentals.
Given the importance of market sentiment we suggest in case of a risk-on environment or at least a normal environment to take profit after around a 4,5-5% combined return of the pair. In case the current turmoil should continue we suggest to set a stop-loss at 2,5% combined loss and wait.