JPY: Guided by the macro developments – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that at the start of the week the release of Japan’s Q2 GDP report printed a much better than expected 1.0% q/q upturn as GDP has now grown for an impressive six consecutive quarters, but the release failed to have much impact on the JPY due to the currency’s role as a safe haven but also because there is no real anticipation in the market that the better growth data would translate into a change of course for BoJ policy.

Key Quotes

‘This year, there has been a clear move by several major central banks towards a less dovish policy position.  The Fed and the BoC have already hiked rates this cycle, the ECB is expected to taper its asset purchases programme next year and 2 members of the BoE’s MPC voted for an immediate rate rise at this month’s policy meeting.  Despite this the BoJ has continued to stress that it has no plans to alter its huge QEE programme.  The reasoning behind this is simple.  Despite the fact that Japan’s economic growth has been one of the success stories of 2017, there remains very little inflationary pressures.”

“The latest CPI inflation reading in Japan stand at 0.4% y/y for both headline and core, well below the BoJ’s 2% target.  Last month the BoJ admitted that “the recent developments in the consumer price index (CPI, all items less fresh food) have been relatively weak, excluding the effects of a rise in energy prices, mainly against the background that firms' wage- and price-setting stance has remained cautious”.  It also conceded that “with regard to the risk balance, risks to both economic activity and prices are skewed to the downside” and confirmed no change in its policy stance.”

“From the perspective of the carry trade, the BoJ’s policy suggests that the JPY should weaken vs. other major currencies.  In the year to date EUR/JPY has climbed by 5.5% this year.  That said, the unwind of bullish USD positions has helped fuel a 5% drop in the value of USD/JPY this year after the strong rally in the final weeks of 2016.  The yen’s function as a safe haven has also played an important part in guiding the JPY in 2017.  Concerns regarding South China Sea at the start of the year and intermittent fears regarding the level of tension between N. Korea and the US have contributed to a firm yen despite the lack of returns associated with the currency.  Due to the unpredictability of geopolitical tensions and the trade-off between safe haven demand and the use of the JPY as a funding currency for carry trades, we have maintained a forecast range for USD/JPY this year.  We remain of the view that most activity will be confined to the USD/JPY110 to 115 area assuming geopolitical tensions do not worsen beyond current levels.  We expect EUR/JPY to maintain its uptrend and target a move towards the 136/137 area on a 12 mth view.”