USDJPY: Some optimism, mostly caution - TDS

Research Team at TDS, suggests that the resounding win for PM Abe and prospects of extraordinary fiscal (and more monetary) stimulus has shifted the USDJPY pendulum to the topside.

Key Quotes 

“Easing risk aversion and a better tone to recent US data releases contributes to upside risks for the pair.

We remain cautious overall, however, as the global macro  landscape remains very uncertain. Current conditions support a continued move higher in risky assets, but this depends on whether the delicate equilibrium driving markets since the Brexit aftermath can be sustained.

From a tactical perspective, the balance of risks favours an extension higher in USDJPY. After several days of solid gains we are reluctant to chase the move particularly ahead of a Japanese holiday on Monday. Ideally, we would like to build longs on a dip back toward the 104.00/50 range.

As we near the BoJ decision later this month, the large overhang of net shorts may come under further pressure.  A break above Fibo-derived resistance at 108.47 and 111.39 is likely but we think 114.30/50 area should cap momentum as this may represent the transition point where any extension higher must be supported by broad USD strength rather than a reliance on JPY weakness.

From a strategic perspective however, there are considerable two-way risks that reinforce our neutral view on the pair. We see a number of factors that have us questioning whether the cycle bottom is in. In particular, the risks of disappointment are high amid elevated expectations for a large stimulus. We see limited capacity for Japanese officials to weaken the JPY. A return to the cyclical highs will require higher US real yields and thus, a the USD to do much of the heavy lifting. The latter two are elusive at this point in time.”