From the FXWW Chatroom: USD/JPY is largely still driven by the real rate differential between the US and Japan.
This week we find reasons for that differential to widen. The JPY side should see market
expectations building for new fiscal spending following the weak performance of Abe’s
party at the weekend’s Tokyo election. The fiscal support is good for Japan’s inflation
expectations, which pushes real rates lower, and portfolio outflows from Japan. Positive
risk sentiment globally should also help the JPY to weaken.
The Tankan survey also showed that corporates’ expectations for USD/JPY are roughly
unchanged. Assuming this is reflective of the broader investor community, this suggests
that Japanese investors may continue to invest abroad on an increasingly FX-unhedged
basis, which would strengthen USD/JPY. The BoJ is also unlikely to follow in the
footsteps of other DM central banks to turn more hawkish. BoJ’s Kuroda recently stated
it is too early to discuss exit strategy from policy accommodation, with the weak May
core CPI and Tokyo June CPI numbers reinforcing the case for them to stay dovish.
On the US side, our economists expect US ISM manufacturing to come in strong today,
and the Fed to remain on course in the Fed minutes. The employment report on Friday is
also likely to continue pointing to a tight labour market with wage growth ticking up,
which should help US yields and USD/JPY work higher.
From a technical perspective, USD/JPY has also broken a chart level and could see
further upside. The risk to this trade is a significant fall in US yields which would benefit
JPY the most within G10.
We like to buy USD/JPY at market with a target of 116.00 and stop at 111.50.
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