USD/JPY: Yen has room to rally over the longer-term - CIBC

Analysts at CIBC, see the Japanese yen strengthening over the long term and they forecast USD/JPY at 108 by Q2 2019 and 105 at Q4 2019. 

Key Quotes: 

“The risk-on rally kicking off 2019 has caused investors to pare back calls of further USDJPY downside. We can see this from movement in the options space, wherein demand for downside USDJPY puts (USD puts, JPY calls) have been reduced compared to equivalent delta calls. Digging deeper, it’s clear that portfolio flow, rather than domestic fundamentals, have been the key arbiter for the yen’s performance. Indeed, low domestic yields continue to point towards outward bound retail flow, as the rolling 12-week outflow has risen in-line with USDJPY so far this year.”

“Even the weakness in the JPY hasn’t stopped key BoJ speakers from talking up further easing measures. We interpret those comments as a reaction to external developments on the trade front and the slowing internal economic cycle. At this point, the hurdle for further easing is very high, given that the Bank already owns around 50% of the domestic JGB market and over 70% of Topix ETF’s. The 10-yr yield has yet to test the implied upper range since guidance for it was shifted last year, while domestic financial stocks have underperformed this year.”

“The JPY should remain stable for the time being, but the yen has room to rally over the longer-term. Slower macro liquidity growth, upside risk to cross-asset volatility and a sizeable current account surplus are still supportive themes to keep tabs on. That should see the yen strengthen, with USDJPY falling to 106 by the end of 2019.”