FXStreet (Delhi) – Taisuke Tanaka, Strategist at Deutsche Bank, lists down what to watch in USD/JPY pair as it has swung back after the BoJ surprise.
Key Quotes
“The USD/JPY had fallen below 120 again. Having received many inquiries, we repeat our basic view. Immediately after the BoJ announced it was adopting negative interest rates, the USD/JPY rebounded to 121.69 (Bloomberg) by unwinding of the shorts. With the surprise impact having ended, we think the market will likely take a more sober look at the BoJ policy.
We think applying negative interest rates to a portion of the C/A deposit is unlikely to deliver a breakthrough in terms of meeting the 2% inflation target and overcoming global risk-averse symptoms. However, in terms of FX analysis, we saw it as effective in curbing JPY appreciation risk. There had been concerns of a worsening spiraling of risk-averse sentiment in the unlikely event of the USD/JPY falling below 115.
Adopting negative interest rates can preserve room for QE expansion and make further interest rate cuts possible, and thus puts in place measures to address risk-averse sentiment. It will also likely contribute to lower JGB yields and increase pressure for portfolio rebalancing to increase foreign bond purchases. These measures contributing to making the USD/JPY to stay in the 115-125 range is important for sustaining the uptrend.
In the short term, some retracement of the USD/JPY following a rebound is within our expectations. This will likely present the first occasion to observe how Japanese investors move to buy on dips. While Japan investors are unlikely to become the drivers of a rally to and beyond 125, we can at least expect them to gradually strengthen their support again by dip-buying.
However, conditions in the US and China and for stock prices and crude oil are a more basic issue for a USD/JPY bull outlook than BoJ policy and Japanese outflows. If these lack stability, BoJ policy’s impact on a weaker JPY will also likely prove unsustainable. We see a modest calming in global markets following excessive pessimism through January as a fortunate development for the BoJ and Japan.
However, as soft economic indicators from the US and China this week indicate, the USD/JPY may need to survive a slightly nervy adjustment period. We see the USD/JPY recovering gradually within the 115-125 range, and look for a range of 125-128 in the medium term as a firm floor for US economic indicators and staged interest rate hikes work in favor of the USD/JPY.”
(Market News Provided by FXstreet)