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22 May 2015
USD/JPY sees more upside potential in the interim, key reasons – RBS
FXStreet (Barcelona) - Brian Mangwiro, Strategist at RBS, highlights the three key reasons why USD/JPY rallies have further room to the upside.
Key Quotes
“There is room for USD/JPY rallies in the interim, with or without additional BoJ easing, on the following reasons:
Diverging monetary policies and growth prospects. This is well flagged: BoJ is committed to expanding its balance sheet by ¥80trn/yr until it hits the 2% inflation target; the Fed is contemplating policy tightening. Our US Trading Desk economists forecast a Sep’15 hike; markets are currently pricing in Fed lift-off for Jan’16. Widening balance sheet and front end rate differentials between Japan and the US should drive USD/JPY higher.
USD/JPY has been tightly correlated to US long end yields over the past six months; rising as the bond market sells off, and vice versa. Along with our US Strategists’, we believe long end US rates are likely to continue rising into Q4’15, especially if US data rebounds and commodity prices (particularly oil) remain resilient. It’s also worth noting that Fed Chair Ms Yellen and her vice-Chair, Mr Dudley (both policy doves) have recently commented that long end rates are potentially too low.
Positioning is favourable. Speculative JPY short positions have fallen to pre-QQE lows (bottom right chart). Levered players led the short covering. Bearish interest seems to have switched to the EUR, among other currencies. There has also been a washout in USD longs; now ~45% below their pre-FOMC and all-time highs. We think positioning is now clean. If US data rebounds in line with ours and the Fed’s expectation, USD/JPY should post a decent rally, and primarily from Dollar strength.”
Key Quotes
“There is room for USD/JPY rallies in the interim, with or without additional BoJ easing, on the following reasons:
Diverging monetary policies and growth prospects. This is well flagged: BoJ is committed to expanding its balance sheet by ¥80trn/yr until it hits the 2% inflation target; the Fed is contemplating policy tightening. Our US Trading Desk economists forecast a Sep’15 hike; markets are currently pricing in Fed lift-off for Jan’16. Widening balance sheet and front end rate differentials between Japan and the US should drive USD/JPY higher.
USD/JPY has been tightly correlated to US long end yields over the past six months; rising as the bond market sells off, and vice versa. Along with our US Strategists’, we believe long end US rates are likely to continue rising into Q4’15, especially if US data rebounds and commodity prices (particularly oil) remain resilient. It’s also worth noting that Fed Chair Ms Yellen and her vice-Chair, Mr Dudley (both policy doves) have recently commented that long end rates are potentially too low.
Positioning is favourable. Speculative JPY short positions have fallen to pre-QQE lows (bottom right chart). Levered players led the short covering. Bearish interest seems to have switched to the EUR, among other currencies. There has also been a washout in USD longs; now ~45% below their pre-FOMC and all-time highs. We think positioning is now clean. If US data rebounds in line with ours and the Fed’s expectation, USD/JPY should post a decent rally, and primarily from Dollar strength.”