USDJPY: U-shaped path

Research Team at Societe Generale, suggests that the yen recovery is probably not over yet and USD/JPY upside is likely to be delayed until later in H2, as neither a sudden acceleration in the Fed tightening path nor imminent BoJ action seem very likely.

Key Quotes

“USD/JPY could go even lower...

After losing credibility in setting negative rates and facing sharp yen appreciation, the Bank of Japan has to wait before contemplating any new bold action. In that context, the risk of policy mistakes remains elevated, and it is presumably dangerous for the central bank to react against an unfavourable market environment. The issue of timing is tricky, and presumably, it would be more successful acting decisively in a context of mounting US yields and performing risk assets than in fighting the market in the midst of a risk-off phase. Our Japan economists are also doubtful that the BoJ will implement additional QQE. The forces that could dampen the yen appreciation are now pretty limited, so the recovery probably has further to go.

...before bouncing later in H2

While we suspect that the yen recovery is not over, USD/JPY is likely to end the year higher. The Japanese policy arsenal, aiming at a weaker currency, is not out of ammunition, and we expect dollar strength to return along with recovering US inflation expectations by year-end, while the Fed will eventually hike again. Fed Chair Yellen tried to reassure markets after the poor US job report and clearly left the door open for a second hike this year. But the timing should remain uncertain for some time. This makes it hard to predict when USD/JPY will reach its bottom, but it makes a rebound likely. However, Fed gradualism and the new policy mix in Japan do not support a return above 120 but rather a softer appreciation probably.”

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