USD/JPY outlook appears constructive – Danske Bank

Kristoffer Lomholt, Senior Analyst at Danske Bank, assessed the positive prospects for the pair in the next months.

Key Quotes

“While USD/JPY has long had a high positive correlation to 10Y US bond yields (via e.g. risk sentiment, pension fund flows) this correlation has been amplified by the Bank of Japan’s (BoJ) introduction of yield curve control”.

“Although the Japanese economy continues to recover we expect no imminent policy normalisation as inflation/wage pressures remain low and inflation expectations have dropped steadily”.

“Meanwhile, we expect the Fed to continue its tightening cycle by announcing quantitative tightening details in September and hiking rates in December (the market only prices a 40% probability of another 2017 hike)”.

“With the latest rebound, USD/JPY has breached the July bearish trend line, which is a bullish signal. According to IMM, data positioning is already long but we suspect strong long covering since the last coverage period”.