USD/JPY looks strong – bounce or break?

BTMU: Bounce To Prove Fleeting; To Top Between 106 and 107 Levels.

Market expectations of added monetary easing and fiscal stimulus have been building, with hopes of a mixture of monetary and fiscal policy management in the form of helicopter money. These expectations are likely to support the USD/JPY lower bound at around 104.00. However, even as USD/JPY has been rising, details about policies to stimulate and enhance Japan’s growth momentum have been scarce.USD/JPY may top out at between the 106.00 and 107.00 levels. Japanese exporters could also limit the upper bound for USD/JPY close to month’s end by selling USD/JPY.

Prime Minister Abe met with ex-Fed Chair Ben Bernanke this week for advice on ending deflation. We do not expect any helicopter money, as past experience shows that sizeable fiscal stimulus and monetary expansion are unlikely to boost Japan’s growth potential. Any comments by policymakers may further stress the markets, but are unlikely to affect the direction of USD/JPY ahead of the July 28th -29th meeting.

Credit Suisse: To Top Out Around 106 Before Dropping Towards 100 in 3 Months

We suspect that between now and the outcome of the next BOJ meeting on 29 Jul, the market will build enough of a head of steam to take USDJPY back towards its pre-Brexit Vote trading levels around 106.00, much as many global equity markets have recovered or pushed beyond their own pre-Brexit levels.

But with that already amounting to a significant rally from post-Brexit lows, we suspect the market will struggle to push much beyond that level before 29 Jul unless very clear signs are given that a major easing move is on the cards.

Credit Suisse Japan economists are still calling for no change at this month’s BOJ meeting, arguing instead that all we will see are further modest rate cuts and bond buying operations in November. If they are right, our existing 100 USDJPY 3m target will still look reasonable. Our economists do however hold out the possibility that the BOJ and government will aggressively continue on with the existing playbook, and introduce direct and unlimited BOJ buying of government bonds hand in hand with a much more aggressive inflation target.

DB: Hedge JPY Buying Around 105 Could Trigger 100 Break.

The impact of Brexit hit a delicately balanced world and pushed up the JPY as a safe currency. A speculative positioning squeeze has subsequently added a layer of support to the Y100 level.

Nonetheless, we expect ongoing hedge related JPY buying to materialise at Y105, and eventually trigger a break of the Y100 ‘where additional yen buying (dollar selling) from a number of Japanese sources is likely, including exporters, life insurers and pension funds.

Can/will policymakers intercede and stop the yen’s appreciation? Probably not. Even a huge supplementary budget and additional BoJ easing will not stop JPY strength emanating from the current global environment. USD/JPY moving all the way to 90 is possible in a bear scenario if European and Chinese risk-off concerns reassert. However, the rate could again test the 100 level in a USD bull scenario where the US economy is firming and the Fed hikes at least once this year. We expect the risk environment to swing between these scenarios.

Our USD/JPY forecast is 97 for end-3Q and 94 for end-4Q of 2016, followed by USD/JPY broadly flat lining in 2017.