FXStreet (Guatemala) – Analysts at TD Securities explained that JPY longs look like the stronger hand.
See latest price action here as Yen hits fresh lows.
Key Quotes:
“We have turned increasingly JPY bullish in recent months and we see the yen as one of the better-performing G10 members in the weeks ahead. Indeed, the break below August’s 116.18 USDJPY panic lows suggests some further yen appreciation may be in the cards.”
“The Japanese economy has enjoyed a substantial boost to its terms of trade, benefitting greatly from the sharp decline in energy and other commodity prices. Japan’s growth outlook has stabilized while domestic deflation pressures are showing some signs of easing. Importantly, Japan’s external flows have improved substantially. This, combined with a still-cheap currency compared to its G10 peers could set the stage for a further JPY recovery.”
“Importantly, the focus is turning away from monetary policy for supporting growth in Japan. We think the BoJ is likely to disappoint persistent hopes for another round of monetary easing in the foreseeable future.”
“Instead, the focus there is turning to fiscal policy and wage increases to support growth. While the current round of annual wage negotiations are said to be off to a slow start, we do not think this is enough to prod the BoJ into further (large scale) easing in the foreseeable future.”
“Indeed, with the BoJ is rapidly approaching the practical limits of its asset purchase programme, any changes at this stage may be limited to symbolic acts or changes to the composition of their purchases.”
“At the same time, we are now on the other side of the Fed’s long-awaited first rate hike. As we expected, the onset of the Fed’s first tightening cycle has not engineered a widespread USD rally—at least in G10FX. Indeed, the USD’s performance since the 18 December FOMC is decidedly mixed.”
“While the USD is (unsurprisingly) stronger against the commodity-linked currencies and the GBP, it remains virtually unchanged against the EUR. The JPY, however, is approximately 4% stronger during this time. As we have expected, much of the anticipated Fed tightening cycle appears to be priced in for the USD at this stage. This is a cornerstone of our overarching view that the longstanding USD rally is approaching its peak. Indeed, against the JPY, we believe it already has.”
“This backdrop presents an important contrast to the sharp declines seen in both equities and USDJPY last August. While some of the same root causes remain in play—in particular the nagging concerns over US growth momentum, oil prices, and the health of the Chinese economy—we are now at a different point in the global monetary policy cycle. In August, a large swath of the market was looking forward to another round of BoJ easing to come at their October 2015 meeting, while the anticipation of Fed tightening provided a firm backstop for the USD.”
“With the BoJ effectively on hold and the Fed’s first hike now behind us, however, we think the degree of central bank support underpinning USD/JPY is considerably less. This leaves us looking for the FX market to converge to equity market signals rather than the reverse as in August.”
“This does not suggest we think Japanese policymakers are likely to completely surrender to market pressure for a stronger JPY. Tellingly, comments from an unnamed “Japanese Official” that they were “closely watching” currency markets put an abrupt end to Wednesday’s declines and sent USD/JPY back above 116.50. We think the overall goal will be to moderate volatility and keep market conditions from turning disorderly rather than trying to push spot back to their highs.”
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