EUR/JPY: 6 month forecast stands at 118.8 - Rabobank

Jane Foley, senior FX strategist at Rabobank, points out that since late September 2018 there has been a clear, albeit bumpy, trend lower in the value of EUR/JPY.

Key Quotes

“The move fits with the backdrop of slower growth in the Eurozone, a more dovish ECB and a broad drop in risk appetite which traditionally benefits the safe haven JPY.  Measured from late Sept, the EUR has lost around 8% vs. the JPY.  In fact in this period the JPY is the best performing G10 currency.  The gains in the JPY suggest that risk appetite has fallen in the past 8 months or so in line with increased concerns about world growth.”

“While the JPY is the best performing G10 currency since late September, the USD has almost kept pace, losing just 2% vs. the JPY in this timeframe.”

“It is likely that interest rate differentials are playing a part in steering safe haven flows towards the USD and thus limiting downside potential for USD/JPY.”

“Various models of purchasing power parity suggests that against many G10 currencies, the JPY is undervalued.  This conclusion may also be drawn from the BoJ’s measure of Japan’s effective exchange rate.  The index is currently just above its 2016 level, but that was the low since the early 1970s.  If the USD continues to divert safe haven flows from the JPY, it will be helpful to BoJ policy makers in their efforts to shore up inflationary potential.”

“On the back of interest rate differentials we expect the greenback to continue diverting safe haven flows from the JPY. We thus anticipate that downside potential for USD/JPY could continue to be slow.   We have a year-end forecast of USD/JPY108.00, although we currently see downside risk to this view.  Our 6 month forecast for EUR/JPY stands at 118.8.”