USD/JPY: Bulls again must wait, but still headed for uptrend – Deutsche Bank

In view of Taisuke Tanaka, Strategist at Deutsche Bank, accusations that US President Donald Trump leaked top secret information to Russia sparked a downturn in the USD/JPY to nearly ¥110.

Key Quotes

“The rate had rebounded to the mid ¥115 level in March prior to the Fed rate hike but, hurt as well by the withdrawal of the government's health care proposal, subsequently slid back toward ¥110. There was an upswing back to ¥114 once beyond April, when nerves had been on edge over the economy and politics. The rate has now fallen again from this level. USD/JPY long positions had built up, and the latest worries over the Trump administration amplified a technical correction just underway.”

“Given the rising chance that the administration's stimulus could be smaller and later than promised, we now forecast that the rise in the USD/JPY will be gradual but continue through 2018. At the same time, we note that while the rate should maintain its basic uptrend, uncertainty over US politics and policy could cause instability and temporary unexpected downturns.”

“If the Trump administration had appeared in danger in January, when market expectations regarding policy were so high, disillusionment could have intensified the risk-off sentiment. Belief in the feasibility of Trump's policies has since retreated significantly due to the balance of power between the administration and Congress. The resulting disappointment has thus also been less severe. Some market participants even take the positive view that relations with Congress would be smoother if Vice President Mike Pence were to become president.”

“However, there remains a good chance that the Trump administration will continue in a dysfunctional state, preventing fiscal stimulus measures from being enacted. This would be seen as risk-negative by the markets and could affect the timing of the Fed's rate hikes. Neither can we rule out the possibility that the administration could take a harder line externally in order to strengthen its position domestically. A further rise in the USD/JPY beyond ¥110 is unlikely to be sustainable for a while, and bullish sentiment on the rate may find it difficult to gain momentum.”

“That said, we do not believe at this point that the latest events have put an end to the USD/JPY uptrend. Our main scenario is still that investors should be patient, as from late March through April, until around ¥110, when the uptrend should reassert itself. As a near-term indicator for the USD/JPY, we should keep an eye on US long-term yields as an overall gauge of Fed policy, the US economy and fiscal stimulus.”