USD/JPY: Gradual up-shift in range bound market – Deutsche Bank
Taisuke Tanaka, Strategist at Deutsche Bank, recommends tactical dip-buying in USD/JPY pair as rate seesaws along gradual ascent towards 116 by end-2017.
Key Quotes
“The USD/JPY surpassed the May high of 114.37 and hit 114.49 (Bloomberg) last week, and then fell back to the 112s level. We expect the USD/JPY to seesaw along a gradual ascent towards 116 by end-2017. We think a sudden rise in the USD/JPY like in Nov-Dec 2016 on heightened US economic and policy expectations is unlikely, and continue to recommend strategically buying on dips.”
“Recently, US indicators are soft overall, and the rise in the USD/JPY is not due to favorable conditions in the US. In contrast, economic conditions in Europe are improving earlier than expected, causing the EUR/USD to rebound as the ECB seeks tapering in QE, USD indexes are weakening. This has reined in capital outflows from China, thus buying its indexes some respite. Commodity currencies are also rebounding on better economic conditions outside the US and weaker USD index.”
“With a poorer outlook for the US being offset by better outlooks for countries/ regions outside the US, global risk-on sentiment has boosted the USD/JPY. We believe that the rise in UST yields that has driven the USD/JPY higher has been more tied to rising Eurobond yields than to the strength of the US economy. If we do not see a return of strong US data and expectations for rate hikes, then the USD/JPY upward momentum will likely be difficult to sustain.”
“Overseas speculative investors' yen short positions in excess of those in Nov-Dec of 2016 seem a little overdone in light of current fundamentals. For the USD/JPY to rise further going forward, we will first be watching for a recovery to strong US indicators, as per our forecast. Second, in September we will be watching for a starker contrast to form between the BoJ, which we expect to maintain supereasing, and the Fed and ECB, which we think could start looking for an exit from QE.”