USD/JPY: US policy to weigh heavily in near term – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, has doubts about US policy which is likely to weigh heavily in near term on the USD/JPY pair, but suggests that bullish medium-term outlook remains unchanged for the pair.

Key Quotes

“Before resuming its uptrend in the medium term, we think USD/JPY will likely be capped in the near term. However, as market participants are already aware of many risk indicators, they could on occasion wind back the shorts they build up, causing a technical rebound. We will be closely monitoring factors below while looking at a range of 111 ±3.”

“Our first warning factor is that US economic indicators could be lackluster overall for a while. Although US economic sentiment has been improving from early on owing to expectations for the Trump's policies, movement in real economic indicators has not necessarily strengthened yet. There may be an impact from heavy snow in March and a warm winter overall in the first quarter.”

“Our second factor is that the next hike in US interest rates is expected in June, so this will unlikely be a story for immediate dollar buying. Third, market participants are unlikely to doubt for long whether the Trump administration can deliver its policies. Fourth, it will be difficult to build USD/JPY longs this month before the US-China summit meetings, release of the US Treasury's Exchange Rate report and the first Japan-US economic dialog meeting. Last, uncertainty surrounding the French presidential election could also make market participants cautious on risk-taking (although we see little possibility of an ultra-right administration).”

“Turning to domestic factors, although the opposition continues to attack Prime Minister Shinzo Abe over the scandal involving his wife, Cabinet's approval rating is still relatively high. According to the BoJ Tankan released today, the benchmark business conditions DIs increased from December 2016 but was lower than the market consensus, and the forecast for June declined. Although USD/JPY's bullish trend path remains alive, there are still no deciding factors to boost it again.”

“We remain positive on the US economy and interest rates, as well as on the administration delivering fiscal policy, and do not change our core bullish view of USD/JPY. We assume the rate will not stay below 110 for long: we see it recovering to the 115-120 level in 3-6 months, and look for further upside subsequently. The greatest risk to this view is of course policy failure for the Trump administration. In the near term, our major focus is on the policy decision-making process.”