Sluggish USD/JPY market – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, explains that the USD/JPY remains weak as the short-term impetus for the markets is less the fundamentals or medium-term interest yield outlook than a combination of positions and event flows.

Key Quotes

“The USD/JPY faces several bearish factors in the near term. (1) The USD/JPY failed to hold at the over-¥115 level after the Fed's recent rate hike as position adjustments prevailed. (2) The next Fed rate hike is not expected until June and does not look to be a bullish factor for now. (3) It will take some more rate hikes before yen carry moves become active enough to spur the USD/JPY higher. (4) UST yields have been unexpectedly soft, sapping the momentum of speculators such as programs linked to yields. (5) US President Donald Trump's withdrawal of the proposed healthcare reform legislation has raised doubts over the viability of other major policies. Domestically, (6) Prime Minister Shinzo Abe's approval ratings have fallen due to a scandal involving his wife, raising worries over the outlook for Abenomics; and (7) settlement-related fund flows in the approach to the fiscal year-end, such as profit-taking by corporations and institutions, may have worked against the USD/JPY somewhat. In addition, (8) speculations that the ECB would move toward normalization of their current super-easing policy earlier than having been expected are hitting strong USD stories against not only EUR but also JPY.”

“Along these lines, the USD/JPY might drop to ¥108 if doubts over the feasibility of Trump's policies should spark a negative reaction in the stock markets. Moreover, USD/JPY bulls may be reluctant to rebuild their long positions in April ahead of the US Treasury Department's foreign currency report and startup of a US-Japan economic dialogue.”

“However, the implications of the above are different from a medium-term perspective. Regarding (1)-(3), the Fed continues to seek the opportunity for further rate hike steps. (4) We believe yields will turn back upward as the resilience in the US economy is confirmed. (5) We feel it would be premature to dismiss the chances for Trump's tax reform scheme (e.g. breaks for middle class, corporate tax cuts) based on the healthcare plan's fate (although his tax plans could become more simple). (6) There are no urgent expectations of macroeconomic policy measures under Abenomics, nor are there any apparent alternatives to Abe as leader. (7) Most of the settlement-related flow should have been completed by mid March. (8) The Fed’s monetary tightening steps are expected to go faster than ECB’s exiting steps from super-easing.”

“Consequently, we maintain our basic view that the USD/JPY will return to ¥115-120 in the next 3-6 months without staying at below-¥110 level so long.”