FX Flash
Group Economics Macro & Financial Markets Research
16 August 2016
USD/JPY to break below 100? Market fundamentals do not support stronger yen
Roy Teo
Verbal intervention from MoF likely; more BoJ easing expected
Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
Market fundamentals do not support stronger yen In our last FX flash on the Japanese yen on 2 August, we argued that the yen is likely to trade between 100 to 104 against the US dollar. A combination of declining real interest rate differentials between the US and Japan in recent days and stop losses triggered below 101 have pushed the yen towards the 100 level at the time of writing. This has raised concerns that the yen could break the ‘psychologically-important’ 100 level. In our view, we do not expect yen strength below 100 against the US dollar to be sustainable for several reasons. Real interest rate differentials between the US and Japan remain higher than levels when the yen last traded around 100 on 8 July. Hence we suspect the current yen strength is due to stop losses being triggered and driven by short term momentum. In addition, crude oil prices, which are negatively correlated to the yen, have recovered. Last but not least, the yen options market is not reflecting huge demand to position for further strength in the yen. Real interest rate differentials; USD/JPY
USD/JPY options bias
Level
%
2 weeks USD/JPY risk reversal skew
1
125
0.50
120
0.30
115
0.10
110
-0.10
105
-0.30
100 Jan-16
Mar-16
May-16
Jul-16
-0.50 Sep-16
USD/JPY (lhs)
0 -1 -2 -3
-4 Jan-15
Jan-16
Jul-16
2wks USD/JPY options bias
10y US-JP inflation expectations adjusted yield spread % (rhs) Source: Bloomberg
Jul-15
Source: Bloomberg
Verbal intervention from MoF likely; more BoJ easing in September expected We expect verbal interventions from Japan’s Ministry of Finance should the strength of the yen (which is not supported by market fundamentals) persist. That should cap further gains in the yen. However at this juncture we do not expect Japan to directly
Insights.abnamro.nl/en
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FX Flash - USD/JPY to break below 100? - 16 August 2016
intervene in the currency market given that volatility in the yen is not extreme. Furthermore, it would be difficult for Japan to justify intervention (in the absence of disorderly currency market) ahead of G20 meeting on 4-5 September. Nevertheless, given the weaker than expected economic performance in Japan in the second quarter, the Bank of Japan is likely to increase monetary stimulus as soon as the next monetary policy meeting on 21 September. As a result, the yen could ease lower towards the 104 level against the US dollar.
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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FX Flash - USD/JPY to break below 100? - 16 August 2016