Stay short EUR/JPY in 2017 – RBC CM

Analysts at RBC Capital Markets note that the JPY remains the best-performing G10 currency in 2016 and expect it to be amongst the best-performing currencies in 2017 also, but they play that view against EUR rather than USD to avoid USD/JPY’s leverage to the US rate cycle given the uncertainty over the Fed outlook in advance of any real detail on fiscal policy under President Trump.

Key Quotes

“Our central expectation is still that domestic investors in Japan are more likely to raise than reduce hedge ratios on foreign bond portfolios. On domestic policy, the BoJ’s concentration of bond holdings in certain sectors and its attempt to target both the price and quantity of money are likely to force a debate on tapering well before the year is out and we expect attention to return again to the central bank’s lack of policy options. While Japan remains in substantial current account surplus, failure to lift nominal GDP growth is positive rather than negative for the currency.”