JPY forecasts revised: Trump market to 115 – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that they are withdrawing their view that the USD/JPY downcycle will result in a steady decline toward 90 and now they think a rise in US rates on Trump policy expectations will strengthen support for USD/JPY in the 100-105 range due to buying driven by underlying demand.

Key Quotes

“Our new USD/JPY forecasts are 109 at end-2016, followed by quarter-end levels of 112, 114, 115 and 115 in 2017. In line with our forecast revisions, we close our Blueprint USD/JPY short recommendation.” 

“The combination of Trump as a Republican president with Republication House and Senate majorities is dramatically changing the US economic and market outlook. The key determinants of USD/JPY's direction will be the firmness of the US economy, and interest rate trends.”

“Expectations for Trump campaign promises such as dramatic tax cuts, public infrastructure investment, financial deregulation, and the new “Homeland Investment Act” tax cut have resulted in a more favorable US economic outlook that overturns the key conditions for our bearish USD/JPY forecasts. Our US rates strategy team sees the 10y UST yield rising to 2.5% by mid-2017. This suggests that USD/JPY could approach 115.” 

“USD/JPY peaked at 125.86 in June 2015 and fell to a low of 99.02 in June 2016. Rolling back level by 50% of this decline is 112.44, while a Fibonacci’s 61.8% rebound level is 115.61. In other words, our new forecasts just imply a mid-phase rebound in the USD/JPY's downtrend. USD/JPY has rapidly reversed its dramatic Abe market rally, and we expect this sharp rebound to bring it into line with other G10 currencies, which we see weakening against the dollar until 2017.”

“An expectation-driven rally could cause USD/JPY to reach our 110 near-term and 115 medium-term targets earlier than planned and then fall back. Japanese investors and importers would likely be cautious about chasing the dollar at 105-110 and even more so above 110. We would expect the market to become more unstable at around 110-115 where there is little support from underlying real demand.”