Bullish or bearish JPY?
In the past 24 hours, the lack of a bazooka from the Bank of Japan (BoJ) and ‘inaction’ from the Fed have been positive drivers of a stronger Japanese yen. We were disappointed that the BoJ did not cut the policy rates further into negative territory and lowered the interest rate on funding through the Loan Support Program to -0.2% to reduce the impact for banks. However they have tweaked their policy to steepen the yield curve by purchasing JGBs such that the 10 year JGB yields will remain around 0%. This should support bank lending activities and is a negative for the yen as inflationary pressures recover. Having said that firmer yields at longer tenors may result in pension funds and life insurers reducing their purchases of overseas assets as domestic yields become less unattractive. Hence the pressure on the yen may be less pronounced. Nevertheless, real interest rate differentials between the US and Japan are also holding up after adjusting to both the BoJ and Fed events. The latter is not supportive of a stronger yen against the US dollar. In addition, financial markets have not fully priced in our view that the Fed is likely to raise interest rates later this year in December.
FX-Flash-Bullish-or-bearish-JPY-22-September-2016.pdf (239 KB)
USD/JPY: 100-104 range still likely
Volatility in the yen has increased overnight, though levels are not extreme that would warrant currency intervention by the Ministry of Finance in Japan. Nevertheless, we expect strong verbal interventions from Japan should the yen strengthen past the 100 level, which is likely to trigger weak stop losses and exacerbate volatility in the currency. Hence yen strength below the 100 level is likely to be temporary as overcrowded speculative long yen positions are unwound due to fears of currency intervention. According to Bloomberg, the Bank of Japan and Ministry of Finance are due to exchange opinions on financial markets in their regular meeting later today at 2pm local time. Further monetary stimulus from the BoJ is also likely in order for them to achieve their 2% inflation target. Please see our Japan Watch – BoJ delivers no new stimulus. This should cap the strength in the yen. On the other hand, weakness in the yen is likely to be limited to around 104 as an increase in hedging of foreign currency flows support the yen. Our year end USD/JPY forecast is 103.