USD/JPY bullish momentum unlikely if December Fed rate hike expectations rise – Deutsche Bank

The USD/JPY has remained in range trading around ¥110 with no strong motivating factors while the overseas speculators still maintain some long positions, and the unwinding prior to events pressured the rate below ¥110, explains Taisuke Tanaka, Strategist at Deutsche Bank.

Key Quotes

“Subsequently, short positions constructed around the low end of the range were partially unwound before the weekend, boosting the dollar back to ¥110.”

“The UK election left Prime Minister Theresa May's Conservatives with a reduced presence in Parliament, raising concerns of a cliff edge risk through the Brexit deadline of FY3/19 without a clear resolution in UK-EU negotiations. With growing speculation as well over the Italian election, European fears remain rife. Still, UK and European events have been distant occurrences for yen markets, which have been little affected.”

“The big event this week is the FOMC meeting on Tuesday and Wednesday. The markets fully anticipate a 25bp rate hike, and the focus is rather on hints toward the next rate increase. However, the Fed might not send a strong signal given the recent softness in job data and the CPI. In that case, communications regarding the Fed's balance sheet adjustment plans will be a point of concern. If this is seen as taking place from September, a December rate hike scenario could become the more consensus view. A six-month gap in Fed rate action following an increase this month would curb UST yields as FX movers, which would sap the upward momentum from the USD/JPY.”

“The BoJ is expected to reaffirm current policy at its upcoming Monetary Policy Meeting on 15-16 June, so the event should be little factor for yen markets.”

“We maintain our view of a steady uptrend in the USD/JPY over the medium term in line with the strength of the US economy and resulting rate hike steps by the Fed. In the short term, however, the markets should continue to fluctuate within the present range for some time even with a Fed rate hike this week. We continue to recommend tactical buying on weakness in the USD/JPY at the lower end of the current range.”