USD/JPY likely to weaken on fundamental factors - CIBC

Analysts at CIBC point out that Japan’s economic data continues to show decelerating trends, but its external surplus and a softening US Dollar Index should see JPY strengthen. They forecast USD/JPY falling to 103 over the second quarter of next year. 

Key Quotes: 

“There are few changes to the BoJ front, as domestic data continues to be moribund and indicative of an ongoing deceleration. Industrial production came in weaker than expected for the month of June, and lead indicators still point to downside in the months to come. Additionally, the Tankan survey indicated relatively weak optimism among domestic manufacturers.”

“With other major central banks adopting a more dovish posture, we expect the Bank of Japan to do the same, as CPI (ex-fresh food) continues to be well below the Bank’s target. Governor Kuroda has already suggested that guidance could be updated to indicate that the low-level for short and long-term rates will be in place past the Spring of 2020, and later into the year. Additionally, although 10-year JGB yields have risen, the odds that they threaten the bottom end of the implied BoJ range (-20 to +20bpns) is increasing. As such, we expect that the Bank may widen the range.”

“We don’t envisage that the diplomatic spat with South Korea will cascade any further. However, it does hamper important trade relations, as Japan exports close to 8% of its goods to Korea. We expect that the JPY will continue to trade as a barometer for global risk and portfolio flows for the time being, which may preclude a near-term rally. Nonetheless, a positive external surplus and the possibility of USD weakness point to strategic JPY gains over the long-term.”