USD/JPY: Upside risks from higher oil prices and trade talks - Danske Bank

According to analysts from Danske Bank, the USD/JPY pair will move modestly higher over the rest of the year. 

Key Quotes: 

“GDP growth on the verge of turning negative has started to plague the JPY. In our view, these disinflationary trends are important to monitor and could quickly turn into deflationary trends. The Bank of Japan (BoJ) continues to emphasise its willingness to keep monetary policy accommodative and we expect no changes before the end of 2020 at the earliest. However, its actions are starting to look contradictory as, in our view, slowing monetary growth will not bring the BoJ closer to its inflation aim – it could furthermore start to become a JPY-positive.”

“The recovery in risky assets to start the year weighed on the JPY on a broader basis. A renewed setback in risk sentiment would support the JPY. Another risk to keep in mind is the potential for oil prices to overshoot if, e.g. supply risks materialise. That in turn would be JPY negative. Finally, the US has started to look towards the JPY in a potential second stage of the world trade war (another JPY-negative risk factor).”

“2019 does not look to be particularly USD-positive following a recently more dovish tone from the Fed. However, we are vigilant to recent disinflationary red flags in Japan. We forecast USD/JPY at 112 in 1M and 113 in 3-12M (up from 110 in 3-6M and 112 in 12M).”