Deutsche Bank strategists continue to see USD/JPY biased to the downside. They forecast USD/JPY at 110 by mid-2019, 105 by end-2019 and at 100 by end-2020.
“We revise our forecast path for USD/JPY slightly higher, and push back the timing of reaching 100 to 2020. However, we continue to be biased for a lower USD/JPY for three main reasons. First, the Japanese remain very long USD assets from stocks, to bonds, to credit, to equity stakes. Holdings would be vulnerable to a US risk asset correction, weaker US growth, or a softer USD, with hedge ratios historically low. Given this, the risk of a squeeze lower in USD/JPY appears greater than chances of a benign trend lower. Second, Japan may shift to reducing emphasis on their 2% inflation target, with recent Finance Ministry comments notable. If the US is simultaneously transitioning to tolerating above 2% inflation, this would suggest higher real rates in Japan, alongside lower real rates in the US which should weigh on USD/JPY. Finally, the focus will shift more to US-Japan trade relations in the coming months. To the extent that currencies have featured in trade discussions with Mexico, Canada and China, further JPY weakness could become more politically challenging.”
“The risk to our view comes from continued JPY funding for carry trades, M&A activity with Japanese companies cash rich, a radical shift by the BoJ towards more easing, or the GPIF raising the ceiling on their foreign bond allocations.”
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