JPY: Downtrend re-established – RBC CM

Adam Cole, Research Analyst at RBC Capital Markets, suggests that their revised forecasts remove most of the short-term hump and shift the longer-term profile lower in parallel taking the trough to 100.

Key Quotes

“Beyond the pricing in of a March Fed hike – which now appears almost complete – money markets would need to price in a much steeper pace of tightening for 2018 in order to drive USD/JPY higher. As post-US election capital flows data continue to accumulate, Japanese investors are still unloading foreign bond holdings rather than adding to them as the rise in yields would suggest and as many had expected as a mechanism for JPY weakness.”

“The post US-election USD/JPY rally (two thirds of which is still intact) is therefore largely a speculative phenomenon. This measure of positioning is at its highest level for more than two years and managers appear to have added to long USD/JPY exposure during the seven big figure pullback in spot. Speculative investors have probably built positions partly on the expectation that rising global yields and capped yields in Japan will pull capital out of Japan, driving JPY down. The longer this fails to happen, the greater the risk that positions unwind driving USD/JPY lower.”

“We also note the risk that even if capital does start to flow out of Japan, much of it will likely be FX hedged, given the big rise in FX hedged yields in all foreign bond markets in the last six months. Finally, liquidation of Japan’s gargantuan holdings of French bonds is another upside risk for JPY heading into the French election, though we think the hurdle for panic selling is high.”