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30 Sep 2013
Flash: USD/JPY has no conviction; whats the range to be? - JP Morgan
FXstreet.com (London) - Research and strategy teams at JP Morgan take a look into the performance of the Yen.
Key Quotes:
"USD/JPY will keep to its recent range (96-100) into year-end".
"A yen short still looks like one of the most widely-held positions in currency markets (along with an AUD short and a MXN long), and we still expect USD/JPY to break above100 again next year".
"But the interim path is quite unclear. Required conditions for trend yen weakness are higher US rates and tame US/Japanese interest rate vol, since vol spikes reduce the incentive to move into carry trades even if rates are rising. Certainly the BoJ has managed to crush Japanese rate vol, which is now below the levels it slipped to before the April 2013 BoJ announcement of QQE (35bp on 3Mx10YR Japan swaption vol). And we are also fairly certain that US rates are heading higher in early 2014, since they are looking too low on some basic valuation measures (there is no term premium in money markets above the Fed’s 2015 and 2016 policy rate projections)".
"But we have no confidence in what month the uptrend in US rates will begin; that inflection point is data-dependent in perhaps the G-10 economy with the least-consistent growth performance this year. In the interim, there is some short-term risk of a USD/JPY collapse, either because Washington fails to resolve the shutdown/debt ceiling debates by the required deadlines, or because the Nikkei plunges in anticipation of higher capital gains taxes in January (see USD/JPY forecast change – a little more explanation, Sasaki, September 24)".
"We downplay the role of various structural reform proposals (TPP trade pact, corporate tax cuts, labour market liberalisation, broader GPIF mandate) as a driver of USD/JPY upside in the absence of higher US rates, since some measures are unambitious (corporate tax cuts on capex) and others are on a timeline too long to influence markets now (TPP, GPIF asset allocation)".
Key Quotes:
"USD/JPY will keep to its recent range (96-100) into year-end".
"A yen short still looks like one of the most widely-held positions in currency markets (along with an AUD short and a MXN long), and we still expect USD/JPY to break above100 again next year".
"But the interim path is quite unclear. Required conditions for trend yen weakness are higher US rates and tame US/Japanese interest rate vol, since vol spikes reduce the incentive to move into carry trades even if rates are rising. Certainly the BoJ has managed to crush Japanese rate vol, which is now below the levels it slipped to before the April 2013 BoJ announcement of QQE (35bp on 3Mx10YR Japan swaption vol). And we are also fairly certain that US rates are heading higher in early 2014, since they are looking too low on some basic valuation measures (there is no term premium in money markets above the Fed’s 2015 and 2016 policy rate projections)".
"But we have no confidence in what month the uptrend in US rates will begin; that inflection point is data-dependent in perhaps the G-10 economy with the least-consistent growth performance this year. In the interim, there is some short-term risk of a USD/JPY collapse, either because Washington fails to resolve the shutdown/debt ceiling debates by the required deadlines, or because the Nikkei plunges in anticipation of higher capital gains taxes in January (see USD/JPY forecast change – a little more explanation, Sasaki, September 24)".
"We downplay the role of various structural reform proposals (TPP trade pact, corporate tax cuts, labour market liberalisation, broader GPIF mandate) as a driver of USD/JPY upside in the absence of higher US rates, since some measures are unambitious (corporate tax cuts on capex) and others are on a timeline too long to influence markets now (TPP, GPIF asset allocation)".