USD/JPY: ¥111±3 range for now – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, believes the USD/JPY will remain in a ¥111±3 range in the short-run and do not rule out the possibility of a brief slump to ¥108 in the recent cautious and nervous markets.

Key Quotes

“The USD/JPY remained firm despite the disappointing 98,000 MoM gain in US non-farm payrolls in March. We believe the sluggish employment figures are largely attributable to weather-related noise and do not believe they will greatly dampen expectations of a Fed rate hike in June. Still, US indicators are likely to be patchy for now, sapping the momentum for those with a bullish USD/JPY view.”

“Politically, we await the announcement of the US Treasury Department's report on Foreign Exchange Policies of Major Trading Partners, the first US-Japan economic dialogue (18-19 April) and the French presidential election. Geopolitical risk in East Asia as well as Middle East is likely to be a market theme. Under these conditions, we imagine speculators will be hesitant to build USD/JPY long positions soon.”

“Over the medium term, we maintain our belief that the Trump administration's promised tax cuts, even if only partially realized, would further strengthen the US economy, prompting a steady monetary tightening by the Fed and upward path in the USD/JPY. Our US interest rate strategist has lowered the 10y & 5y UST yield forecast to a continuation of the present 2.25-2.50% & 1.75-2.00% for coming 3-6 months and 2.75% & 2.25% at year-end, respectively, with seeing the tax cuts should be implemented. The main driver of the uptrend in the USD/JPY in the initial stages of the Trump Rally was held to be the UST yield rise, and a 10y yield of 2.6% is seen as consistent with a USD/JPY rate of ¥115, and 3.0% with ¥120.”

“A forecast of 2.75% would seem to point to a currency rate of ¥117, a milder slope than our forecast of a rise to ¥120-125 within the year. However, we are expecting three Fed rate hikes this year, followed by four in 2018. In addition, we believe the driver for the USD/JPY will shift from UST yields related flows to the spread between US and Japanese short-term rates (yen carry trade), and reiterate our view that the rate will try the over-¥120 level in 1H 2018.”