FX Flash
Group Economics Macro & Financial Markets Research
08 July 2016
JPY to retest 100? Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
JPY bias towards 100 Pressure for BoJ to take action this month has increased More verbal comments from MoF – intervention still unlikely
JPY bias towards 100 As real interest rate differentials between US and Japan continue to decline further into negative territory, a stronger Japanese yen towards 100 against the US dollar is likely. Though outward investments from Japan have continued to increase in June, it is evident that currency hedging has increased. Hence the downward pressure on yen is less pronounced. Lower crude oil prices overnight also supported the yen as Japan is a net oil importer. Tonight’s US non-farm payrolls will be crucial. We expect a weaker print of 150k versus market expectations of 180k. Hence concerns on the strength of US labour market could resurface. This is likely to weigh on the US dollar and push the yen stronger towards the 100 level. Pressure for BoJ to take action this month has increased The pressure for the Bank of Japan to step up its monetary stimulus later this month has increased. Since the last monetary policy meeting on 16 June, the yen has strengthened by more than 5% against its basket of currencies. The BoJ has also recently downgraded its economic assessment of 2 out 9 prefectures. Bank lending growth has slowed in June and inflation expectations have declined into negative territory for the first time since 2012. In addition inflation ex food, energy and sales tax has declined from 1.3% in December 2015 to 0.8% in May this year. However given that volatility in long term JGBs have surged more than tenfold post Brexit, an expansion of JGB purchases could exacerbate volatility in the JGB market, which may not be conducive for the economy.
More verbal comments from MoF – intervention still unlikely This morning, Japan Vice Finance Minister Asakawa said that they are vigilantly watching financial markets, especially foreign exchange markets. He warned that they would act properly if there are speculative moves. In our view, it is unlikely that Japan will intervene in the currency market given that volatility in the yen has subsided recently and hence it would be difficult to justify to the G7. It is also evident that the yen has strengthened due to safe haven flows with global bond yields plunging. As a result any unilateral intervention by Japan is only likely to weaken the yen temporarily.
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