USDJPY to rise to 128 by the end of 2017 and 135 by the end of 2018 - BNPP

Steven Saywell, Global Head of FX Strategy at BNP Paribas, suggests that their year-end forecast for USDJPY stands at 128 – the highest amongst forecasting banks according to the latest Bloomberg consensus.

Key Quotes

“We are committed to this above-consensus forecast and think a long USDJPY position represents the top FX trade idea for 2017. We initiate a 1 Year USDJPY RKO: Strike 121.50 with KO 132.50 for a cost of 38bp (spot ref: 113.40).”         

“Our expectations for USDJPY to reach 128 is driven largely by developments in the US, particularly the anticipated rise in US yields as markets continue to price for increased Federal Reserve rate hikes. Our colleagues in rates strategy predict a further rise in US 2y sovereign bond yields in 2017 to 190bp from the current level of 110bp. We expect no significant response from Japanese monetary policy, which will likely continue to focus on maintaining 10y JGB yields at zero. In contrast, we think the ECB will start to reduce its purchases of bonds under the current quantitative easing (QE) programme during 2017 and will exit completely by H1 2018. The greatest central bank policy divergence will therefore be between the US and Japan, driving up USDJPY considerably.”

“Our medium-term FX forecasting model, BNP Paribas CLEER™, signals that USDJPY’s current valuation of 123 will rise to 131 at end 2017 and further to 136 by end 2018. During H2 2016, USDJPY appeared undervalued relative to its CLEER valuation for the first time since September 2012. The primary driver of CLEER’s bullish USDJPY projection is the divergence in relative rates (2y swap rate differentials between the US and Japan). CLEER indicates that the interest rate differential in isolation would increase the fair value of USDJPY by 10% between December 2016 and December 2018. Expected CPI changes, particularly the increase in US inflation following President-elect Trump’s planned fiscal expansion, should mitigate the relative rates divergence somewhat.”