USD will experience a broad-based softening this year - Rabobank

Analysts at Rabobank note that after GBP, the JPY is the next best performing G10 currency on a 1 month view. As is often the case, the recent gains in the yen have been more of a function of overseas rather than domestic events.  The JPY’s function as a safe haven currency has ensured that it has become a conduit for investor anxiety connected with recent tensions in the Korean peninsula.  Although these tensions have intensified recently, concerns regarding N.Korea combined with the prevailing strains between Japan and China regarding the S.China Sea have arguably lent support to the JPY through much of this year. 

"The JPY, however, has not been the only asset reflecting a less than content outlook. Despite the push higher yesterday the S&P 500 and US treasury yields are trading well below their March high and US treasury yields.  The recent spate of disappointing US data includes a softer than expected increase in non-farm payrolls in March combined with softer PPI, CPI and retail sales data.  It is not just this spate of soft economic indicators which questions whether expectations of the Trump reflation trade have been overdone – political divides in the GOP also suggest there may be too much good news in the price. "

"Stock market’s yesterday were lifted by remarks from Treasury Secretary Mnuchin promising tax reform by the end of the year. These comments, however, follows an admission earlier in the week from the Treasury Secretary that the expectation of tax reform by August was now “highly aggressive to not realistic”.  The withdrawal of Health Care reform bill earlier this year provides strong evidence of the difficulties within the Republican Party in finding agreement on fiscal reform.  Despite the huge differences between healthcare and tax reform, a common theme is provided by the backdrop of a budget deficit outlook under strain from an ageing population.  Given that there is still so much good news priced into US stock markets and the USD, we remain sceptical on the ability of the Trump administration to meet market expectations for reflation."  

"It is our expectation that the USD will experience a broad-based softening this year as expectations of reflation in the US decline. Without upside pressure in the USD, the BoJ’s hugely accommodative monetary policy will have less power to push USD/JPY higher and will therefore have less overall market impact.  Yesterday comments from BoJ Kuroda provided reassurance that the BoJ is committed to its current QE policy.  The remarks should counter fears that the BoJ may contemplate tapering this year; the JPY did soften in reaction to the statement.  That said, the discussion about BoJ tapering is in part a function a concern that the central bank could run into supply constraints.  These fears are unlikely to completely dissipate." 

"While the combination of Kuroda’s remarks and those of Mnuchin on US tax reform provided support to USD/JPY yesterday, we are sceptical as to how much follow through impact there will be. When our softer USD forecast is added to prevailing geopolitical concerns, we see a strong risk that the JPY will remain very well supported this year vs. the USD.  Our base forecast is for USD/JPY to trade around the 1.09 level over the next 6 month or so.  A worsening of geopolitical risk, however, could open up further downside potential for USD/JPY."