USD/JPY dropped sharply in response to the BoJ’s policy inaction in April. The outcome eroded the market’s belief that the BoJ will be easing anytime soon, if at all, and may argue for further JPY appreciation.
We still think that policy divergence could remain a USD/JPY driver even if it has to rely on only one engine for now – the Fed tightening policy from here.
Below we assess the impact on USD/JPY of the persistent widening of the USD-JPY rate spreads expected by us and the (more dovish) market consensus. Our results point at sustained USD/JPY strength ranging from 3% to 6% by year-end 2016 and 10% to 12% by the end of 2017.
The results suggest that the policy divergence implied from our rates forecasts could push USD/JPY at 116 by end-2016 and 121 by end-2017. When using the consensus expectations, the result is a very gradual appreciation to 111 by end- 2016 and 119 by end-2017.
If we were to relax the above assumption and add some stock market outperformance, presumably on the back of more government stimulus and/or further BoJ easing, this changes the results to a degree. Assuming that Nikkei revisits its recent highs around 18000 – a fairly conservative assumption – it could lift our projections for USD/JPY to 118 by end- 2016 and 123 by end-2017. When using the consensus rates forecasts, we arrive at 113 by end-2016 and 121 by end-2017.
'This content has been provided under specific arrangement with eFXnews.'
Advertisement
For a live simulators for bank trade positions and forecasts, sign-up to eFXplus
eFXnews is a financial news and information service. Articles and other information distributed in this service and published on this site are provided in general terms and do not take account of or address any individual user's position. To the extent that some of these articles include suggestions as to various possible investment strategies which users might consider, they do so in only general terms without reference to the personal factors which should determine any user's investment decisions to buy or sell a specific security or currency.
The service and the content of this site are provided and distributed on the basis of “AS IS” without warranties of any kind either, express or implied, including without limitations, warranties of title or implied warranties of merchantability or fitness for a particular purpose. eFXnews and its employees, officers, directors, agents, and licensors do not also warrant the accuracy, completeness or timeliness of the information in any of the articles and other information distributed in this service and included on this site, and eFXnews hereby disclaims any such express or implied warranties; and, you hereby acknowledge that use of the service and the content of this site is at you sole risk.
In no event shall eFXnews and its employees, officers, directors, agents, and licensors will be liable to you or any third party or anyone else for any decision made or action taken by you in your reliance on any strategy and/or advice included in any article and other information distributed in this service and published in this site.
Recommended Content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold reaches to all-time highs near $2,230, US PCE eyed
Gold price appreciates to all-time highs near $2,230 per troy ounce, attempting to continue its winning streak for the fifth successive session on Friday. However, trading volumes are light as market participants are likely observing Good Friday.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.