JPY: Balanced risk and reward - HSBC

Analysts at HSBC are looking for USD-JPY to move generally sideways barring fresh news on the geopolitical front, with little else likely to alter the relative story.

Key Quotes

“If there is to be action around the JPY it is more likely on the crosses, notably against the EUR, GBP, and AUD.”

“The two principal drivers will remain bond yield differentials and risk appetite. On the latter front, it is hard of course to forecast how the situation in North Korea might evolve, but the latest headlines at least suggest tensions are easing for now. This de-escalation could of course change in an instant so the market may be wary of chasing USD-JPY upward when there is always the risk of a geopolitically driven reversal. If the situation should deteriorate afresh, the market will likely challenge support on USD-JPY at 108.70 and 108.10 rather swiftly.”

“Yield differentials remain the critical driver to USD-JPY. Of course, part of this differential is aligned with risk appetite. Rising geopolitical tensions favour US Treasuries and the resultant lower yield sees the differential compress and USD-JPY fall. The JPY may act as the “safehaven” currency during such periods, but it is still echoing moves in the 10Y bond yield differential. In the last month, the correlation between daily changes in the differential and changes in USD-JPY has been a lofty 0.82.”

“For markets fixated on the cyclical debate of which central banks are moving to the exit and how quickly, we believe the BoJ’s justifiable hesitancy will make it hard for the JPY to strengthen (our year-end forecast of 100 for USD-JPY anticipates that structural and political drivers of the failure of Abenomics will become dominant).”

“But if USD-JPY is likely to track sideways, we see scope for the JPY to do better on the crosses. EUR-JPY is one such example and we expect EUR-JPY to break below the August low and 50-day MA of 128.09. We would also favour being short AUD-JPY, with a challenge of support at 85.00 likely in the near term while GBP-JPY is likely to push below 140 and test support at the June low of 138.607 especially as the 200-day MA has just been broken.”