FXStreet (Córdoba) – Analysts from Brown Brother Harriman, analyzed recent USD/JPY moves and its possible implications.
Key Quotes:
“Last year was the fourth consecutive year that the yen fell against the dollar. However, what is obscured by this factoid is that over the past six months, the yen has been the strongest of the major currencies, rising almost 3.2% against the US dollar. While some may be tempted to attribute the yen’s strength to the dismal start of the year for equities, the fact of the matter is that the yen’s strength began before this week.“
“Recall that 48 hours after the Fed hiked rates last month, the BOJ announced some largely operational adjustments to its asset purchase program. The explicit goal was to sustain the asset purchases, and this included extended the duration of government bonds being bought. The BOJ announced that it would buy more equities (ETFs) as well. “
“Although in the past, extending maturities of bonds being purchased by a central bank was considered easing, this time is seen differently. It was seen as a sign of the BOJ reluctance to step up it efforts.”
“The dollar-yen and the S&P 500 were highly correlated, but that relationship has weakened since mid-November.”
“Another frequent driver of the dollar-yen exchange rate is interest rate differentials (…) Interest rate differentials look to still be supportive for the dollar.”
“Japanese investors typically prefer buying foreign bonds to foreign equity. However, this seemed to change starting in late November. (…) For their part, foreign investors typically prefer Japanese stocks to bonds. However, in the last four weeks, this pattern has changed as well.”
“Although last week, when it had appeared that the dollar would hold above JPY120, the technical condition looked more supportive of picking a bottom. However, the damage inflicted by yesterday’s decline leaves us somewhat less sanguine over the near-term outlook. We had anticipated that a strong US employment report at the end of the week would strengthen expectations of another Fed hike in late Q1.”
“A convincing break of Monday’s low near JPY118.70 could spur a quick move toward JPY118.00. A break of that could be ominous as there is little chart support until closer to JPY116.”
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