USD/JPY: Dull but still supported – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, recommends tactical buying on weakness at ¥110 or lower, i.e., at the low end of its current range.

Key Quotes

“The USD/JPY has remained in a ¥111±3 range since April. The rate tried the low end of that range in the nervous April markets, then rebounded toward the high end in May. However, it failed to break through and has since subsided.”

“US non-farm payrolls for May were below the consensus with an increase of only 138,000. Nevertheless, this was seen as a solid gain given conditions of nearly full employment, and the Fed is widely expected to raise rates this month. In Japan, the Nikkei average returned to ¥20,000 in a fairly steady market. We believe pension funds and life insurers will move to buy foreign securities at ¥110 or below, which should provide direct support for the USD/JPY.”

“At the same time, we cannot see market participants buying decisively beyond this level for now. US economic data should remain steady overall, but individual results could be mixed. Moreover, the political uncertainty over the Trump administration looks to continue. Market participants may hesitate to hold USD/ JPY long positions at the higher side of the range until former FBI director James Comey's congressional testimony this week.”

“In Europe, it is getting unclear whether the ECB will announce a revision to its forward guidance toward a normalization from its ultra-accommodative policy at the Governing Council Meeting on Thursday. Furthermore, a win by Prime Minister Theresa May's Conservative Party in the UK general election that same day is no longer a certainty, making it difficult for the markets to take a position. While these are matters for the euro and pound, yen market participants are unlikely to take bold action until these results are confirmed.”

“US policy, international politics and geopolitical risk all look to be noise for the markets even if the news itself proves insubstantial. The USD/JPY may be buffeted by these turbulent factors in the near term, but we expect the rate to strengthen over the medium term in line with the buoyancy of US economic indicators and the Fed's rate hikes.”