Market Analysis

Yen Bull Stamps Hoof

Japan’s MUFG believes “the risk of a break to the downside for USD/JPY is building.” The Japanese bank doesn’t see “a strong fundamental case for the US dollar to stage a sustained rebound at the current juncture even it is clearly heavily oversold.” In the interests of transparency, it’s worth noting that MUFG has long been forecastiny some yen strength appearing versus the US dollar in the second half of 2017 and early part of 2018, so it’s not surprising for them to continue to focus on that argument. Many traders might disagree but for the sake of debate it’s worth highlighting what MUFG currently thinks may drive the yen in the near term. “Over the past month, the yen has firmed as the market has on the whole dampened expectations over the pace of the shift to tighter monetary policy by overseas central banks,” MUFG wrote on Tuesday.

The Japanese house also wonders if rising “tensions between North Korea and the US could be offering some support for the yen at the margin.” Additionally the Japanese bank’s analysts feel “the upcoming negotiations to extend the US debt ceiling and pass a budget for next year in the autumn could also prompt a test of the bottom of USD/JPY’s current trading range in the coming months.” In the here and now “the release overnight of the latest balance of payments report from Japan continued to highlight that the yen remains significantly undervalued,” MUFG contends. “Japan’s current account surplus has widened sharply over the last three years to a cumulative twelve month total of JPY20.4 trillion which accounts for around 3.8% of GDP” which MUFG feels “supports [its] outlook for the yen to gradually strengthen against the US dollar in the year ahead.” Finally while MUFJ admits that “the BoJ’s aggressive stimulus is clearly helping to keep the yen weak,” it also makes the point that comments on Tuesday from ex-BOJ Deputy Governor Kazumasa Iwata (mentioned by some as a possible successor to current Governor Haruhiko Kuroda) “highlight the risk that BoJ policy could become less negative for the yen if Governor Kuroda is replaced when his term ends in April 2018.” Iwata stated that the BoJ should slow its annual bond buying to around JPY40 trillion which he believes would make policy more sustainable. He also believes that the BoJ should modify its long-term interest rate target once it becomes clear that inflation will stay around 1%.
Written by Neal Kimberley, External Currency Analyst.