USD/JPY: Depreciation will be somewhat slower than previously assumed – CIBC

Analysts at CIBC, forecast the USD/JPY pair will trade at 108 during the second quarter of 2020 and at 105 by the fourth quarter. They moderated the outlook for a stronger yen on the back of weaker domestic growth.

Key Quotes: 

“In recent years, we’ve seen JPY investor sentiment, as proxied by leveraged investor holdings, remain largely a function of broader market risk appetite. Sporadic episodes of risk-off trading have witnessed the unwinding of speculative shorts - this year’s retreat in risk appetite being an example. As such, it’s arguable that domestic macro fundamentals are at least partially incidental to underlying currency performance. Macro momentum moderated towards the end of 2019, due in large part to: weak external demand, the sales tax hike, and the lagging repercussions of the catastrophic typhoons. Now, with the economy further impacted by the coronavirus, specifically via supply chain disruptions, reduced import demand from China and reduced tourism flows, we expect further discussions of fiscal impetus.”

“With the BoJ mindful of the issues related to lower and negative interest rates, we expect further (targeted) fiscal stimulus in an effort to limit growth headwinds - rather than further monetary expansion. With episodes of risk aversion likely encouraging JPY purchases, we note that the reduction in real 10-year spreads favour a stronger JPY. For now, with the USD still benefitting from a flight to liquidity, the pace of USD/JPY depreciation will be somewhat slower than previously assumed.”