USD/JPY: Scope for any sustained move higher is limited – MUFG

Analysts at MUFG Bank, consider that if the macro backdrop improves, with Brexit and US-China trade risks receding, the Japanese Yen could weaken further but they believe that would be more against non-dollar currencies. 

Key Quotes:

“On a year-to-date basis, the yen is the 2nd best performing G10 currency – only the Canadian dollar has done better. That reflects the yen being the top performing G10 currency in both Q2 and Q3 during more pronounced risk-off trading conditions when the 10-year UST bond yield fell from 2.40% to 1.65%. We are now of course into Q4 with the global financial market backdrop a little more favourable that suggests the yen could be the loser, helping to push USD/JPY higher. A Brexit deal between the EU and the UK has now been done and passed in parliament while there is optimism
over a partial US-China deal being signed in Santiago, Chile at the APEC meeting on 16th-17th November.”

“US yields remain considerably lower now than prior to the risk-off period and hence the scope for any sustained move higher in USD/JPY is limited. Will a US-China deal greatly reduce the global trade uncertainties? We think not. A partial deal will leave many aspects still to be agreed and President Trump could well then turn his focus to Europe. In addition, a Brexit deal, while eliminating the risk of no-deal does not eliminate the uncertainties over the future trading relationship between the UK and the EU.”

“We do not expect a notable shift in Japanese investor risk appetite. Portfolio outflows will remain largely hedged and Japan’s current account surplus, largely made up of an investment income surplus, will act to provide continued support for the yen. However, given US-China and Brexit developments
coupled with another rate cut by the Fed, we are inclined toward a neutral bias given expectations are already high for some form of a deal in November.”