Market Analysis

120 and stop in 2018? One Scenario for USDJPY

Unveiling its forecasts for next year, Japan’s Nomura Bank sees USDJPY heading up to 120 in 2018. In the Japanese firm’s view “if the [US] economy remains solid, FOMC participants could begin raising their forecasts of future rate hikes at the March FOMC meeting, when the new Fed Chair Jerome Powell makes his debut. In June, the majority view could predict four rate hikes a year. If the market accepts that the Fed will continue raising rates in 2019, USD/JPY could be sustained at around 120 through the end of 2018.” But if Nomura sees US factors as the chief driver of a higher USDJPY, its belief that the upside is limited to 120 is predicated more on possible developments in Japan.

“If the global economy looks stronger than expected, and the Fed raises rates at a faster pace, the BoJ could take this as an opportunity to normalize monetary policy,” the Japanese bank feels. Additionally, “the [Japanese] government might also make the political calculation that keeping USDJPY stable at around 120 would be wiser than upsetting the Trump administration with [an] excessively weak JPY.” Consequently it is Nomura’s conclusion that the BoJ will “hold off on hawkish measures that could strengthen JPY, while playing a role in preventing excessive JPY weakness.”

Written by Neal Kimberley, External Currency Analyst.