USD/JPY: Politics vs. the carry trade - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that in the weeks that followed last November’s US election, optimism about Trump’s reflationary promises ignited the carry trade leading to a 15% appreciation in USD/JPY. 

Key Quotes

“The uptrend fizzled out at the start of this year and since the start of February the currency pair has been fluctuating mostly within a 111.65 to 115.50 range.  Supporting the yen has been a round of better than expected Japanese economic data in addition to market speculation that the BoJ is seeking a stealth tapering of its QE programme.  That said, the value of USD/JPY reflects much more than the carry trade.”

“Since the start of the year, tensions in the S. China Sea and concerns about North Korea’s nuclear programme have had some influence on safe haven demand for the yen.  In the coming weeks, the outlook for US-Japan trade relations could bring fresh incentive for the currency pair.”

“The risk of further verbal intervention from the Trump administration, disappointment about the lack of hawkish sentiments from the Fed earlier this month and speculation that the next policy move from the BoJ could be a tightening all suggest that upside potential for USD/JPY is currently capped.  We have edged down our 3 mth USD/JPY forecast to 112 and see scope for a move back to 110 by year end.”