USD/JPY: Breaking the mould? - Rabobank

In view of the Jane Foley, Senior FX Strategist at Rabobank, a better outlook for global growth has negative implications for safe haven currencies such as the JPY. 

Key Quotes

“That said, one clear caveat is that 2017 also threatens to bring plenty of political pitfalls which could prevent the JPY from given up too much ground.”

“From Kuroda’s viewpoint, signs that the global economy is showing signs of finally being able to shake off the effects of the great recession should be of benefit to the Japanese economy. Not only should Japan’s economy be “able to move further forward, supported by the tailwind”, but the additional policy measures announced by the BoJ in recent years should be a disincentive for safe haven JPY inflow.”

“On several measures of Purchasing Power Parity the JPY is one of the most undervalued currencies within the G10.  Indeed, in 2015 the value of Japan’s effective exchange rate hit its lowest levels since 1973 (BoJ measure) and has since been trading only modestly higher.  This can be viewed as a success for the policies of the BoJ.”

“Despite the fairly upbeat tone struck by Kurodo in his December speech, the clear difficulties for the BoJ in reaching its inflation objectives suggest there is little chance of the BoJ stepping back from its aggressive asset purchases programme any time soon.  It was anticipation of widening interest rate differential between the US and Japan that drove USD/JPY higher in the weeks after the US election.  However, the last few weeks have brought signs of fatigue in this rally.  CFTC data for the first week in January showed speculators modestly reduced their short JPY positions after nine consecutive weeks of building them higher.  More generally the USD has lost its upside momentum as the market awaits validation of the reflationary expectations that have been built into the price since November.”

“The recent gains in the USD combined with the recent movements in US interest rates across the curve suggest that there has been noticeable tightening in US monetary conditions in recent months.  This supports our view that the Fed is likely only to hike its Fed funds rate once more this year.  On anticipation of fading optimistic regarding the pace of US rate hikes, we expect the USD to end the year at softer levels then it started vs. a basket of G10 currencies including the JPY. That said, we expect that the current pull back in the USD could be short-lived and another wave of reflationary optimism may yet be associated with the inauguration of Trump.  For this reason we see scope for USD/JPY to head back towards the 120 area around Q2 before ending the year closer to 115.00.”

“On any significant deterioration in risk appetite during the course of 2017, the chances that USD/JPY will lurch back towards the 110 area can be expected to rise.”