USD/JPY: Yen could outperform in 2019 despite BoJ QQE - Rabobank

Analysts at Rabobank expect the Bank of Japan to remain committed to QQE in 2019 but still, they see scope for the JPY to perform well on safe-haven demand.

Key Quotes: 

“We see scope for USD/JPY to trend lower in 2019. Based largely on the JPY role as safe haven currency we expect a move into the USD/JPY105/110 range by the end of next year.”

“The JPY along with the CHF is an established safe haven. That said, through much of this year the USD has performed this function for many investors. Although the USD can boast huge levels of liquidity, the US’s current account and budget deficits undermine its quality as a safe haven. That said, this year rising US interest rates have enhanced the attraction of the greenback. In the past week a revision in market expectations about the pace and extent of Fed rate hikes has led to a drop in the level of yields across the curve. Expectations of a less hawkish Fed is likely to rebalance safe haven flow back from the USD towards the JPY in the coming months and potentially throughout 2019.”

“Factors that are likely to support safe haven demand in 2019 include fear about the impact of trade wars on global growth and concerns that the US may be headed towards a mild recession as soon as 2020. Despite the optimism on the outlook for a compromise created by President Trump ahead of Argentina’s G20 meeting, we retain the view that US/China trade wars are likely  to extend well into 2019. Issues related to China’s technological practices could take a while to solve while speculation that the US intends to challenge China’s growing military also suggests the possibility of a lengthy stand-off between the two nations.”

“Other factors which could support safe haven demand stem from political issues in Europe. Italian budget issues, fear that France has lost its appetite for structural reform, the risk that the European parliamentary elections could unleash another wave of populism and Brexit all have the potential to worry investors in 2019. On top of this, geopolitical issues could also undermine market confidence.”

“On balance, despite the likelihood that the BoJ will remain committed to extremely accommodative monetary policy, we see the likelihood of JPY outperformance in the New Year.

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