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9 Feb 2016
Conditions right for sustained weak JPY trend – Deutsche Bank
Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the USD/JPY at 110 or below is consistent with their downgraded US outlook.
Key Quotes
“Since the onset of the Abe market in late 2012, the USD/JPY's uptrend has been powered mainly by three forces. The key engines have been a firm US economy and the outlook for US interest rate hikes, and the secondary engines have been factors with direct market impacts: the BoJ's unprecedented monetary easing, and public pension funds' large-scale buying of Japanese equities and foreign securities. The most important of these has been a firm US economy: without this, sustained JPY depreciation would likely not have been possible, whatever action the BoJ took.
Until recently, our economics team forecast a firm floor for US GDP growth at around 2% for 2016-17, and expected the Fed to hike interest rates three times this year and four times next year. Our main scenario in these conditions has the USD/JPY holding at the 115-125 range, testing its upper limit when US rate hikes accelerate and temporarily exceeding 125, which is still alive as our official house view.
However, the US economy's capacity for self-driven recovery has started to show signs of waning since 2H 2015. The BoJ's adoption of negative interest rates also cannot sustain the USD/JPY at around 120, and market sentiment is that future BoJ policy has been stalemated. In addition, on 7 February DB economics team lowered its US GDP growth forecast for 2016 to 1.2% and revised its outlook for US interest rate hikes this year to a single hike in December.
The tricky aspect of our US economic outlook is that it has US economic growth reaccelerating from 4Q 2016 to reach around 2.5% through 2017, and interest rates being hiked four times in 2017. If this scenario materializes, our core range for the USD/JPY potentially shifts down to 110-120 for 2016, the rate likely dips to 110 or below temporarily in 1H, and possibly targets 120 or above late this year or in 2017.
The problem lies with corrections over the next 2-3 quarters. Before it factors in the reacceleration of the US economy that our economists forecast, we think the market will likely tend to give predominance to the risk of a vicious cycle of economic and market factors. For example, in the past, simultaneous drops in stock prices and a widening of credit spreads have been recognized as indicating and promoting the onset of economic downturns. This is a particularly crucial stage for USD/JPY bulls.”
Key Quotes
“Since the onset of the Abe market in late 2012, the USD/JPY's uptrend has been powered mainly by three forces. The key engines have been a firm US economy and the outlook for US interest rate hikes, and the secondary engines have been factors with direct market impacts: the BoJ's unprecedented monetary easing, and public pension funds' large-scale buying of Japanese equities and foreign securities. The most important of these has been a firm US economy: without this, sustained JPY depreciation would likely not have been possible, whatever action the BoJ took.
Until recently, our economics team forecast a firm floor for US GDP growth at around 2% for 2016-17, and expected the Fed to hike interest rates three times this year and four times next year. Our main scenario in these conditions has the USD/JPY holding at the 115-125 range, testing its upper limit when US rate hikes accelerate and temporarily exceeding 125, which is still alive as our official house view.
However, the US economy's capacity for self-driven recovery has started to show signs of waning since 2H 2015. The BoJ's adoption of negative interest rates also cannot sustain the USD/JPY at around 120, and market sentiment is that future BoJ policy has been stalemated. In addition, on 7 February DB economics team lowered its US GDP growth forecast for 2016 to 1.2% and revised its outlook for US interest rate hikes this year to a single hike in December.
The tricky aspect of our US economic outlook is that it has US economic growth reaccelerating from 4Q 2016 to reach around 2.5% through 2017, and interest rates being hiked four times in 2017. If this scenario materializes, our core range for the USD/JPY potentially shifts down to 110-120 for 2016, the rate likely dips to 110 or below temporarily in 1H, and possibly targets 120 or above late this year or in 2017.
The problem lies with corrections over the next 2-3 quarters. Before it factors in the reacceleration of the US economy that our economists forecast, we think the market will likely tend to give predominance to the risk of a vicious cycle of economic and market factors. For example, in the past, simultaneous drops in stock prices and a widening of credit spreads have been recognized as indicating and promoting the onset of economic downturns. This is a particularly crucial stage for USD/JPY bulls.”