JPY likely to stay firm in the months ahead - Rabobank

Jane Foley, the senior FX strategist at Rabobank, notes that on a five day view the JPY is the second worst-performing G10 currency after the CHF but in the year to date, the JPY remains the second best-performing G10 currency after the CAD, giving a truer reflection of the geopolitical and economic clouds that have been gathering over global markets this year. 

• “We expect investors to remain mostly cautious and thus we see scope for the JPY to hold firm in the months ahead.
• Despite the poor performance of Japan’s external sector, GDP expanded by an annualized 2.2% (+0.6% q/q) in Q1 on the back of robust capital spending. That said, looking ahead both weakness in exports and in the consumer sector threatens to weigh on growth.
• In view of the headwinds to growth there is little risk that the BoJ will steer away from its ultra-accommodative policy settings in the foreseeable future. The weakness of wage inflation suggests little risk of underlying CPI inflation creeping near the Bank’s 2 % inflation forecasts in the months ahead with Japan’s looming tax hike and the weakness of the external section underpinning this view.  While this backdrop may appear to lay out a case for a softer exchange rate, price movements in the JPY are largely determined by the market’s broad levels of risk appetite.  In particular, the JPY is sensitive to geopolitical events.
• Looking ahead the JPY would likely soften if a trade pact was agreed between the US and China. However, with more rhetoric from Washington focussing on the need to ‘contain’ the growth of China as both an economic and military power, it seems likely that tension between the two nations will persist in some form for a while.
• This backdrop combined with expectations for slowing world growth are likely to underpin the JPY.  We expect USD/JPY to be trading in the 108 region at the end of the year and see risk of a drop towards 107.0 on a 1- to 3-month view if a trade deal is not signed in this period.”