USD/JPY: Not convinced? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, points out that as a consequence of the BoJ’s dovish forward guidance at the July 31 policy meeting, the value of USD/JPY initially lurched higher.

Key Quotes

“Since then USD/JPY has been moving lower again as the market debates whether or not the ‘tweak’ to BoJ policy regarding 10 years yields was a significant policy change.  The move by USD/JPY below the 50 day sma today suggests that from a technical perspective there may be more downside potential for the currency pair in the near-term.”

“Assuming the USD continues to attract safe haven flows from beleaguered emerging markets, we continue to expect that USD/JPY will end the year moderately higher around USD/JPY113.00.”

“At last week’s meeting the BoJ gave back a little control to the market by announcing that it would allow the range of movement on the 10 year yield to double to -0.2% to 0.2% from -0.1% from 0.1%.”

“There has also been speculation that higher yields could bring a wave of repatriation back to the JGB market from overseas and that this could support the value of the JPY.”

“Bloomberg this morning have published a report suggesting that at 0.2%, yields on 10 year JGBs would still be too low to tempt regional investors to bring the money back home en masse.”

“It also suggests that the BoJ’s policy tweak is unlikely to trigger a sustained round of JPY buying.  This, however, assumes that the market does continue to bet that last week’s tweak in policy was not a precursor of more change.”

“Tomorrow, the release of Q4 Japanese GDP data is expected to show a solid bounce back in economic growth relative to Q1.  This could encourage talk about the less policy accommodation from the BoJ going forward.  However, with CPI inflation well below target and wage growth still soft, we continue to expect the BoJ to maintain a very accommodative policy for some time.”

“Even though various geopolitical concerns could trigger safe haven demand for the JPY in the weeks ahead, we expect that interest rate differentials will ensure the USD remains a significant recipient of these flows this year and we expect further near-term JPY gains to prove temporary.”