Japan FX Insights: JPY guide 2018 (1) Cycle

From: Deutsche-Bank

US economic growth at 2.6% likely to continue supporting up-cycle in USD/JPY The US economic cycle is an important factor in assessing USD/JPY movement over the medium term. Japan’s economy is generally upbeat when the US economy is doing well. The USD/JPY pairs the currency of the world’s largest debtor nation (dollar) with that of its largest creditor nation (yen). In a phase a rise in domestic and overseas economic activity and growing risk-on sentiment, money flow from the creditor nation to the debtor nation with relatively high interest rates picks up and the debtor nation currency tends to climb versus the creditor nation currency. When domestic and overseas economic activity weakens, international money flow stalls and the currency of the debtor nation that relies on financing often slips versus the credit nation currency.

In April 2012, we forecast a rise in the USD/JPY from 75-80 at the time to 100 in 2015 given signs of the US economy embarking on an autonomous recovery. We raised our forecast to 120 after Japan adopted extreme monetary easing under the Abe government. In 2016, we incrementally lowered our forecast toward 100 amid signs of a US economic slowdown. The USD/JPY actually dropped under 100, and we forecasted 90s amid slower US economy in 2017. However, we revised our forecast after the US presidential election, looking for the USD/JPY to rise to 115-120 again on the prospect that the US economy would firm under policies enacted by the Trump administration.

We expect the US economy to sustain healthy 2.6% growth in 2018 and envision one rate hike this month, three and four hikes in 2018 and 2019 by the Fed respectively. If this view is accurate, the USD/JPY is likely to try 120 level.

(To be continued)

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