USD/JPY tops 115 level, eyes on 120 now – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, expects the USD/JPY to top 120 if DB’s new US yield forecasts could materialize.

Key Quotes

“The USD/JPY has already reached our 2017 forecast level of 115. Our revised forecast of 115 announced on 15 November was based on assumed 10-year 5year, and 2-year US Treasuries yields of 2.5%, 1.75%, and 1.25%, respectively, as of June 2017. However, and as we have repeatedly mentioned, a further overshoot is possible, depending on the degree of autonomy for the macropolicy Mr. Trump has committed to.”

“Our economist team has further raised the US economic growth forecasts, to 3.0% for 2017 and 3.3% for 2018. They state that in the near term, growth will likely be considerably above 4% on a quarterly basis, and could reach 5% for 12 quarters. He even says that these forecasts are conservative, and that if they prove incorrect US GDP would be on course to top our expectations.”

“Our US interest rate strategist has raised their US Treasuries yield forecasts to 3.60%, 2.75%, and 1.30% (same maturities as above) as of June 2017. As of 15 November, we assumed a rapid rally driven by the Trump market and set our USD/JPY forecast at 115 based mainly on five-year yield. However, the scenario that these new US yield forecasts could materialize suggests the USD/JPY to top 120 (although we have not yet officially revised our USD/JPY forecast).”

“This week, we look for the BoJ Tankan business conditions DIs (to be announced on 14 December) to show some improvement following the Trumpdriven market rally, which would confirm risk-friendly market sentiment. The FOMC is expected to decide on a rate hike on 14 December, and this would also be a clear support for the USD/JPY. However, even this rate hike by the Fed does not look particularly important for current USD/JPY trading.”

“The market has already factored in several rate hikes over the next 1-2 years, so this week's anticipated hike is only a small step. When looking at the USD/JPY over the next few months, we need to consider both an overshoot and a correction following the rapid rally. However, the trend is clearly upward.”