JPY: Range-Bound For Longer?: Outlook & Forecasts - Credit Agricole

The JPY has been trading within the past few months’ trading range. There is limited room for the BoJ to easing monetary policy further, with still elevated speculative short-positioning that has been keeping currency downside limited during the past few weeks. As the Fed is unlikely to turn more hawkish in the short-term, we do not expect majors such as the USD/JPY to enter a new uptrend anytime soon. However, risk sensitive crosses such as NZD/JPY should remain a buy on dips.

Steadily improving growth and price prospects have been supporting expectations of the BoJ remaining on track to reach its 2% inflation target in time. Accordingly, most central bank members have been suggesting that the current monetary policy stance is appropriate. Indeed, central bank Governor Kuroda just recently reiterated that the BoJ is on its way to meeting its inflation target and that the JPY is no longer excessively strong.

However, irrespective of improving growth and price conditions, inflation expectations as measured by breakeven rates failed to mirror stabilising price developments. This in turn may suggest that uncertainty regarding the central bank’s ability to sustainably deliver price stability remains intact. From that angle it appears unlikely that BoJ easing expectations will normalise further from the current levels.

As a result to the above outlined conditions, the JPY is likely to remain range-bound for longer. However, against currencies such as the NZD or GBP, we expect JPY rallies to remain a sell. Those pairs may benefit from both further diverging monetary policy expectations and improving risk sentiment over the coming few weeks. However, it must still be noted that elevated speculative JPY short positioning is likely to keep carry pairs subject to correction risk.