Japanese yen on tenterhooks - Natixis

Analysts at Natixis, point out that after a high at 118.60, the USD/JPY went back on the decline, mainly because the US dollar was undermined by the protectionist measures advocated by Trump and the decline in US long interest rates despite the hike in the Fed Funds rate decided in March.

Key Quotes

“In this context, the spread between US and Japanese long interest rates did not widen despite the divergence in the monetary policies of the Federal Reserve and the Bank of Japan. The latter has announced that it will maintain its monetary policy aimed at controlling the long end of the Japanese yield curve.”

“Our view is that, in coming quarters, the Bank of Japan will maintain its ultra-accommodating monetary policy. There follows that, in the short to medium term, the performance of the USD/JPY will depend on the trajectory taken by US long interest rates. The US 10-year rate failed to break out above 2.60%, even pulling back towards 2.30% because of doubts over Trump’s capacity to push through his grand tax reform. This had for consequence to drive down the USD/JPY towards 110. In our view, Trump’s stimulus plan is likely to be passed by Congress by this summer, in turn driving up US long interest rates and, therefore, the USD/JPY at the end of the year. However, we no longer expect the USD/JPY to recover back above 120 this year in the face of a US administration bent on taking to task any country running a trade surplus with the US and possessing a significantly undervalued currency, Japan being a case in point.”

“Given the uncertainties surrounding the US tax reform, the USD/JPY will remain volatile in the short term, probably fluctuating between 110 and 114 before recovering towards 119 at the year-end.”