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Upward USD/JPY cycle still has legs to run – Deutsche Bank

FXStreet (Delhi) – Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the US Fed will embark on a tightening cycle soon amid steadiness in the US economy, and Japanese economy is likely to remain firm as well in the coming quarters which strengthens the fact that it is premature to assume a turnaround in the upward USD/JPY cycle, which lags the economic cycle.

Key Quotes

“In the past, the USD/JPY market tends to follow the DI cycle with around 1.5 years lag. The ongoing strength of US economic indicators has spurred expectations of a rate hike, and gradual rises in 2y UST yields are typically accompanied by improving economic sentiment in Japan and an uptrend in the USD/JPY.”

“In other words, the correlation between UST yields and the USD/JPY may seem to have shrunk but remains in force. In the BoJ's quarterly Tankan today, the benchmark large manufacturers business conditions DI slipped to 12 from the previous Tankan's 15, and is projected to fall further to 10 in the next survey. The DI for large nonmanufacturers improved to 25 from 23, but is similarly expected to relapse to 19.”

“Overall, the results were not as bad as feared, but they nevertheless point to a listless economy. The USD/JPY has remained stuck recently at around 120, perhaps reflecting the uncertainty in the economic and interest rate outlook.”

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