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USD/JPY: Tactical longs to remain in play – Deutsche Bank

FXStreet (Delhi) – Taisuke Tanaka, Research Analyst at Deutsche Bank, notes that the USD/JPY up cycle should continue to receive support as long as the Fed moves ahead with interest rate hikes in a background of a strong US economy.

Key Quotes

“We forecast the USD/JPY will be 128 at end-2016. However, even though interest rate hikes will likely continue in 2017, we believe that the USD/JPY average rate that year could be lower than in 2016.”

“The USD/JPY has already risen more than 60% in the current cycle that started in late 2012. However, we do not expect further particular surprises from the BoJ's QQE, which spurred the sharp rally. USD buying by public pensions has supported the rally in terms of supply/demand, but we expect momentum to slow in 2016. Although other institutional investors have to continue buying USD, we expect them to become increasingly hesitant to accumulate exposures at high rates above 125.”

“From a macroeconomic perspective, while interest rates rise in the US, the global economic recovery is not necessarily on solid ground. As US interest rates rise, we may see occasional shifts to risk-off mode due to fragility in equities and emerging markets. In addition to stricter regulations leading to higher costs and lower liquidity in currency-hedging transactions, we expect higher volatility in the USD/JPY in the high-120’s range, and think the current cycle will start to look like it is reaching its peak.”

“In contrast, while US interest rates are rising, we think that Japanese investors and importers will continue to buy USD on dips and provide support to the USD/JPY at the rate around 120. If so, buying of USD/JPY on dips at these levels and gradually selling for taking profits in the rally should remain effective tactics.”

“From 2012-14 we recommended a taking a strategic long position based on the most bullish outlook at that time for the USD/JPY. Since the start of 2015 we have changed our recommendation to a tactical approach, but this has resulted in a good performance. For the USD/JPY in 2016, we think it appropriate to take a similar stance as 2015, while raising the expected high to around 128.”

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