Japan Elections: Look for a higher USD/JPY – Danske Bank
|Financial markets seem complacent that Abe will remain prime minister after the general election on Sunday, and there is hardly any election risk premium priced in the FX option market, explains the research team at Danske Bank. Hence, while USD/JPY could bounce higher after the election if Abe secures a two-thirds majority, market pricing indicates that a possible relief rally would be shallow and short-lived, they further add.
Key Quotes
“But… USD/JPY supported by Fed-BoJ divergence and global business cycle
- We still see USD/JPY moving higher in coming months as the global business cycle environment remains constructive for the cross and as we expect the Fed will hike interest rates in December. We target the cross at 113 in 1M (previously 111) and 114 in 3M.
- Longer term, we expect the combination of 1) Fed-BoJ divergence, 2) higher global yields (eventually) supported by global growth recovery and 3) portfolio outflows out of Japan will continue to keep the cross floating. We target USD/JPY at 115 in 6M and 116 in 12M.
- Downside risks to our forecast primarily arise from the yen’s high correlation with 10Y US yields, a high sensitivity to risk appetite in general and a stretched short JPY positioning.”
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