USD/JPY: New leaf of hope - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that the outlook for risk appears suddenly improved this week.

Key Quotes

“As global stocks markets again reach higher, safe haven assets such as the JPY naturally lose support. The yen this week has registered its biggest one day fall vs. the USD in nearly two years as downside pressure was accentuated by anticipation that the victory for Japan’s ruling coalition in Sunday’s upper house election has paved the way for a generous Y10 trn stimulus package from the Abe government. This promise of extra stimulus was stoked further by a visit to Japan from former Fed Chair Bernanke which re-kindled talk of ‘helicopter money’.

The market is of the view that the BoJ will also increase monetary stimulus at its meeting at the end of this month.

However, there is little room for celebration since the JPY remains around 14% stronger vs the USD than at the start of 2016. The yen’s strength vs. the USD this year partly reflects the broadly softer tone of the USD but it also suggests that some investors have been deliberately keeping one foot in a safe haven trade.

Coming on the back of last week’s better US labour data, the timing of Abe’s strong showing in the Upper House Elections appears to have been fortuitous in its -effect in amplifying the improved market sentiment. Japanese policy makers may be hoping to leverage this better tone even further by drip-feeding snippets of news regarding the forthcoming stimulus package and potentially by allowing the market to anticipate more BoJ stimulus at the end of the month. That said, in an environment in which the fallout from Brexit on EU and global growth is likely to add to levels of investor anxiety, we anticipate that the Japanese authorities are facing a difficult task in weakening monetary conditions vis the exchange rate. In addition to the 14% appreciation of the JPY vs. the USD this year, the value of CNY/JPY has dropped by 16% resulting in a sizeable increase in the value of Japan’s trade weighted index.

Faced with the prospects of an aggressive attempt by the government and central bank to recapture some upside momentum in inflation we do see some upside potential for USD/JPY this year. However, on the back of ongoing concerns about the pace of global growth, we see upside potential as limited. We expect USD/JPY to oscillate within a USD/JPY100 to 105 range in the months ahead.”