In the year to date the Japanese yen has underperformed all of the other 16 currencies designated by Bloomberg as being an FX ‘major’. By contrast only three of these currencies have outperformed the JPY since the June 16 FOMC meeting. In the view of Jane Foley, Senior FX Strategist at Rabobank, the JPY is only likely to strengthen significantly in the coming months if risk appetite were to take a tumble.
Hawkish tilt from the Fed to continue underpinning the carry trade and supporting USD/JPY
“How the JPY performs in the coming weeks vs the USD will depend on how the Fed communicates its monetary policy. Although a couple of other factors are also likely to influence the USD/JPY pair, the widespread assumption that there will be no tightening in BoJ policy settings for some time suggests little support for the JPY from domestic policies in Japan.”
“On June 24, in the wake of the June FOMC meeting, USD/JPY made a new fifteen month high close to 111.12. The latter was a significant psychological resistance level and the failure to hold about this high almost inevitably triggered some selling pressures. Despite the pullback, USD/JPY remained in the uptrend drawn from the start of the year. A break above the 111.12 level could see the currency pair lurch higher.”
“Japan has rolled out three stimulus packages during the crisis. Against the spectrum of various state of emergencies, a slow vaccine roll-out programme, a forthcoming election and, amazingly, a record high in tax revenues in the fiscal year ended March 2021, more spending could reportedly be forthcoming.”
“Triggered by the June FOMC, USD/JPY has rallied faster than our expectations, we have brought forward our forecasts and now see a move to 112 by the end of the year.”
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