JPY: Risks around Trump's congressional address – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the near-term focus for USD/JPY pair is downward risk, but medium-term stance remains bullish.

Key Quotes

“The USD/JPY is trading at the bottom end of its recent range prior to US President Donald Trump's address to Congress tomorrow. Our basic stance is that the correction in the USD/JPY will halt at ¥110-115, but we should be paying closer attention to downside risk at least for the short term.”

“Anticipated topics in Trump's speech of prime interest to USD/JPY market participants are income tax breaks for the middle class, corporate tax cuts, border adjustment taxes and a new Homeland Investment Act (HIA). The president has indicated that he would soon announce a "phenomenal" tax reform plan. If his proposal is similar to that of congressional Republicans, it could be perceived as having little fresh to offer; if it requires significant negotiations with Congress, it could be viewed as unfeasible.”

“We should also watch for any mention of rate hikes in separate speeches by the Fed's chair and vice chairman on 3 March. However, we do not anticipate a rate hike in March under current inflation conditions given the ongoing uncertainty over the Trump administration's policies. Expectations regarding Trump's policies have improved corporate and consumer sentiment and heightened the economic momentum. The USD/JPY may experience a bearish reaction from disappointment in the short term, but the overall trend should remain in place.”

“Euro markets are also being monitored as a possible negative factor for the USD/ JPY. If the euro comes under greater selling pressure ahead of the Dutch and French elections when US conditions are not fully supportive of the USD/JPY, the resulting risk-off sentiment could buoy the yen.”

“This will coincide in the first half of March with settlement flows at Japanese corporations and financial institutions. In recent years, fiscal year-end USD/JPY flows like profit-taking, hedge adjustments and repatriation have not shown clear seasonality. Japanese corporations may choose this year to keep much of their surplus overseas funds abroad (reduce their repatriation) in view of US protectionist sentiment. However, if the USD/JPY is weak toward the fiscal year end, we might to need to see conspicuous bullish yen flows aimed at reducing forex exposure.”

“We believe the correction in the USD/JPY will halt at ¥110-115 in 1Q 2017. For the medium term, we maintain our stance that the USD/JPY will climb above ¥115 in 3-6 months and above ¥120 over a 12-month span in reflection of the strength of the US economy led by Trump's policies.”