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1 Feb 2016
Keep USD/JPY dip-buying with support from BoJ – Deutsche Bank
FXStreet (Delhi) – Taisuke Tanaka, Strategist at Deutsche Bank, suggests keeping the USD/JPY dip-buying tactics with stronger supports from the BoJ policy.
Key Quotes
“The BoJ's introduction of negative interest rates should be meaningful in suppressing the risk of a risk-off upward spiral in the yen beyond 115/dollar. Overseas short-term investors appear to have unwound most of their USD/JPY shorts since the announcement and are building new longs.
Negative interest rates will hurt bank earnings, and we question whether they will spark any significant rise in lending. Just in terms of FX analysis, we believe this interest rate policy will have a more direct yen-weakening impact and should contribute positively to the stock markets and domestic economy.
The first yen-weakening effect should be increased purchasing of foreign securities by Japanese investors in the face of the further decline in JGB yields. Also, while the USD/JPY basis swap should widen, making forex hedging difficult, it should encourage at least some allotment of funds into forex.
Second, the BoJ has preserved room for additional easing in the future. The bank could lower negative interest rates further and utilize its still-potent option of QE (of limited scale) to check the yen-bulls. The situation will work against investors with USD/JPY shorts at ¥115-116.
The BoJ's negative interest rate policy, with the recent saturated risk-off sentiment, would cause the USD/JPY to try the upper end of its ¥115-125 range of the past year. If US economic strength can send the rate to near ¥125 again, it would be consistent with our year-end forecast of ¥128.
In the near term, however, whether the USD/JPY will hold its ground at over ¥120 is an important technical point. We should keep a close eye this week on share prices, oil prices, US data such as Friday's payroll results, and Chinese policy initiatives prior to Chinese New Year. We should also watch whether Japanese real-money investors follow foreign speculators in their buying activity.
We reiterate our recommendation of a dip-buying tactics in the USD/JPY. Our cautious buy recommendation last month at ¥118-116 paid off earlier than expected, thanks to the BoJ. Japanese investors will unlikely become drivers of a rally above ¥125, but we believe the support offered by dip-buying will again gradually strengthen.”
Key Quotes
“The BoJ's introduction of negative interest rates should be meaningful in suppressing the risk of a risk-off upward spiral in the yen beyond 115/dollar. Overseas short-term investors appear to have unwound most of their USD/JPY shorts since the announcement and are building new longs.
Negative interest rates will hurt bank earnings, and we question whether they will spark any significant rise in lending. Just in terms of FX analysis, we believe this interest rate policy will have a more direct yen-weakening impact and should contribute positively to the stock markets and domestic economy.
The first yen-weakening effect should be increased purchasing of foreign securities by Japanese investors in the face of the further decline in JGB yields. Also, while the USD/JPY basis swap should widen, making forex hedging difficult, it should encourage at least some allotment of funds into forex.
Second, the BoJ has preserved room for additional easing in the future. The bank could lower negative interest rates further and utilize its still-potent option of QE (of limited scale) to check the yen-bulls. The situation will work against investors with USD/JPY shorts at ¥115-116.
The BoJ's negative interest rate policy, with the recent saturated risk-off sentiment, would cause the USD/JPY to try the upper end of its ¥115-125 range of the past year. If US economic strength can send the rate to near ¥125 again, it would be consistent with our year-end forecast of ¥128.
In the near term, however, whether the USD/JPY will hold its ground at over ¥120 is an important technical point. We should keep a close eye this week on share prices, oil prices, US data such as Friday's payroll results, and Chinese policy initiatives prior to Chinese New Year. We should also watch whether Japanese real-money investors follow foreign speculators in their buying activity.
We reiterate our recommendation of a dip-buying tactics in the USD/JPY. Our cautious buy recommendation last month at ¥118-116 paid off earlier than expected, thanks to the BoJ. Japanese investors will unlikely become drivers of a rally above ¥125, but we believe the support offered by dip-buying will again gradually strengthen.”