USD/JPY: Repeated phases of range trading likely amid uptrend – Deutsche Bank


Taisuke Tanaka, Strategist at Deutsche Bank, explains that in the first half of May, USD/JPY rebounded more sharply than expected, reaching 114's at one point and was a key step on the way to DB’s 2018 USD/JPY forecast of above 120. However, Deutsche Bank obviously do not expect an uninterrupted uptrend in USD/JPY.

Key Quotes

“While we see numerous positive catalysts for a rise in USD/JPY over the next several months, the clearest driver will likely be an increase in US long-term rates, which we expect to be very gradual. Given the likelihood that the Fed will implement rate hikes at a steady pace, twice in 2017 and 3-4 times in 2018, we doubt that the gap between US and Japan short-term rates will widen enough to significantly boost the yen carry trade, at least within 2017. US economic indicators should firm up going forward, but bumps in the road are likely. This is partly because confidence in the viability of the Trump administration's policies remains shaky. We may also from time to time see heightened concerns about geopolitical risks in East Asia and US-Japan friction over trade or currency issues.”

“In our view, USD/JPY will see repeated phases of range-bound trading within an overall uptrend. We therefore recommend building tactical long positions on dips within these trading ranges each time they occur. We would use any buying opportunities near 110 to build strategic long positions.”

“We also have a bearish medium-term outlook on EUR/USD. Our EUR/JPY forecast is more or less neutral at around 120. However, JPY and EUR volatility is not necessarily caused by the same factors, and we recommend treating a somewhat broad span of 120 +/-5 as the core trading range. While EUR has recently rebounded due to Emmanuel Macron's victory in the French presidential election, the outlook for the ECB to normalize super-easing, and expectations for swifter than-anticipated European economic improvement, JPY has fallen back after overcoming risk-averse catalysts during April, and EUR/JPY has risen to near 124's. This is near the top of our expecting core range, and while tactical short term longs are conceivable our base recommendation would be to sell at this level.”

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