USD/JPY: The Japanese yen may take some guidance from the BoJ – Rabobank

According to analysts from Rabobank the recent move higher in USD/JPY implies that risk appetite is healthy. They noted that while the yen continues to be guided by the market’s overall impression of risk, it may also take some guidance from the Bank of Japan (BoJ). 

Key Quotes: 

“Measured from its September low, USD/JPY is currently trading almost 5% higher. The softer tone of the safe haven yen dovetails with the recent highs made by US stock indices and sends the message that risk appetite is in fine fettle. While this outlook appears to be at odds with the continued fears about global growth, it does sit with the ‘glass half full’ view currently maintained by Federal Reserve President Powell. It also reflects the build-up in optimism in the market through the autumn about the potential for a phase 1 trade between the US and China. Looking ahead to 2020, we expect another surge of safe haven demand for the yen based on expectations of another rise in tensions between the US and China. On the margin the JPY may also find some support in the view that the bar to further BoJ rate policy easing has been raised.”

“In recent years a debate has been raging about the unintended consequences of extraordinary monetary policies. A flattening of the yield curve can damage the profitability of banks and reduce capacity to lend. Cheap money can also promote the numbers of zombie companies with low productivity levels. Central bank action can also result in an inaction bias by other policy makers – specifically it may limit the reforms and fiscal incentives from governments. This week Kuroda added his voice to a lengthening line of central bankers warning about the risks of fiscal complacency. While he also reassured the market that there is still “ample room for further easing”, it is possible to detect a note of reluctance from the BoJ to add to its extravagant policy mix.”

“If the BoJ appears to be dragging its feet about the prospects of further policy measures at the December 19 meeting, the JPY could see some incremental support. That said, the JPY’s role as a safe haven currency means that its outlook will remain aligned to overall risk appetite. Given risk of another step up in tensions between the US and China next year and given our view of a sharp slowdown in US economic activity in H2 2020, we expect USD/JPY to drop towards 107 on a 3 to 6 month view.”