USD/JPY: How correction will be over – Deutsche Bank

According to the Taisuke Tanaka, Strategist at Deutsche Bank, if US fiscal policy fuels faster rate hike cycle outlook, USD/JPY could top ¥120.

Key Quotes

“The USD/JPY entered a correction phase in the two-month "Trump rally" since the US presidential election. The Trump administration will take office on 20 January. We suspect the markets may stay in dull tone for coming months thereafter to gauge whether the president will carry through with his fiscal policy promises. We believe the path this year of the US economy, presently at near full employment, will depend on policy introduction rather than cyclically autonomous change. We do not consider it meaningful to predict market developments until US fiscal policy is clear. If fiscal policy buoys the economy, raising expectations of more than two rate hikes by the Fed within the year, the USD/JPY could rally again to the ¥120 level.” 

“Our US economist's latest forecast calls for US growth of 2.4% in 2017 and 3.6% in 2018. This appears to assume a rise to 3-4% growth from late this year to next year, when stimulus is enacted, which suggests that growth until that point can be unostentatious. The USD/JPY might experience a deeper fall if risk-off events occur outside the US or if the Trump administration moves to talk down the dollar. We had felt that the rate could slump to around ¥110 on at least a partial unwinding of long positions amassed by overseas speculators during the Trump rally.”

“At present, though, the rate has been firm at ¥113-115. Some importers may have seen their dollar-buying contracts knocked out, forcing them to repurchase. Some institutional investors have hesitated to buy new unhedged foreign bonds at the rich level of around ¥115, but may gradually unwind their hedged (dollar short) positions. We believe dollar selling from an unwinding of speculative long positions will be absorbed by such purchase of Japanese companies and investors with dollar short exposure, which should firmly keep the USD/JPY in a ¥110-115 range for some time.”