USD/JPY: To edge upward to ¥115-120 – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, notes that the USD/JPY market has recovered to ¥115, discounting a rate hike at the FOMC meeting on 15 March and technically, the USD/JPY rate could break through the ¥115 resistance line and form a double bottom, signaling the end of the recent correction phase.

Key Quotes

“We believe the USD/JPY will edge upward to the ¥115-120 level not in a straight line but with some fluctuation over the coming 3-6 months.”

“Last Friday's US employment figures were solid but in line with expectations. The USD/JPY consequently declined somewhat due to position adjustments prior to the weekend. The EUR/USD rallied amid a retreat in speculation of ECB easing stance and less concerns on the Dutch election on March 15, which also helped dampen the bullish momentum for the dollar. Some market participants expect a falloff in the USD/JPY, noting that a Fed rate hike this Wednesday has already been fully discounted. However, this should be taken merely as a short-term implication.”

“A far more important point for the medium term is the prospect of multiple rate hikes by the Fed in the coming 1-2 years. Our economists predict three US rate hikes this year and another four in 2018. On that assumption, we believe the USJapan interest rate spread will maintain consistent upward pressure on the USD/ JPY, perhaps to over ¥120.”

“We predict that the BoJ will keep its policy unchanged at its two-day meeting from Wednesday. There remains lingering concern in the markets that the US government could call on the BoJ to revise its yen-weakening policies. However, we cannot imagine the BoJ buckling under such pressure and changing current easing policy at a time when domestic CPI growth is still below 1%. The divergence in US and Japanese monetary policy should continue to support the uptrend in the USD/JPY.”

“The statement from the meeting of G20 finance ministers and central bank governors on Friday and Saturday could, at America's insistence, change its wording on currency problems to a greater emphasis on global imbalances. As the USD/JPY markets sweep past ¥115 and move toward ¥120, we can expect greater sensitivity to the risk of verbal intervention by the US. However, the key over the medium term is that America's macroeconomic policy - i.e., the Trump administration's aggressive fiscal policy and accompanying Fed tightening - will itself push the dollar upward.”