JPY: Watching the US and China - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that while they see potential for USD/JPY to trend up to 120 in the coming month on optimism regarding Trump’s reflation policies, Rabobank expects USD/JPY to end the year lower in the 115 region. 

Key Quotes

“President-elect Trump has already indicated an intention to take a more forthright tone with China with respect to its trade and military policies.  In reference to the seizure of a US underwater drone by a Chinese naval vessel last week, Trump over the weekend accused Beijing of stealing the equipment.  China’s defence ministry has accused Washington of hyping the issue but, given current various international sensitivities related to the South China Sea, the decision by investors to move back into the yen is not wholly surprising.”

“Following the inauguration of Trump next month, his stance towards China will become clearer.  Due to its safe haven appeal, the JPY stands to gain if there is any further deterioration in relations between China and the US.   Given the BoJ’s struggle to reach its inflation target, this would not be welcomed.  Also of concern would be any decision by the PBoC to accelerate the pace of weakening of the CNY vs the USD.  Strong capital outflows from China and a risk that Trump could label China a currency manipulator both suggest that this is a risk.”

“Since the US election on Nov 8, the JPY has been the worst performing G10 currency as widening interest rate differentials between the US and Japan supported the carry trade.  CFTC data show that in November speculators swiftly exchanged long JPY positions for short ones for the first time since December 2015.  The fact the PBoC has been intervening in the market to prevent the CNY from falling sharply vs. the USD has been good news for all of China’s trading partners including Japan.   Since the US election on Nov 8, the value of the CNY has risen almost 10% vs the JPY.  The weakness of the JPY against both the USD and the CNY in recent weeks has amplified the fall in Japan’s effective exchange rate and so enhanced the transmission mechanism of the BoJ’s accommodative monetary policy settings. However, we do not expect this sweet spot for the BoJ to last. We currently see risk of a more accelerated pace of weakening in the CNY vs. the USD over the coming year and expect that CNY/JPY will reverse its recent gains and move back towards the 15.00 level during the course of 2017.”

“While the BoJ will welcome the current bout of USD strength, policymakers are unlikely to let down their guard.  Despite the recent weakness of the JPY vs the CNY, the latter is still trading around 16% lower vs the yen relative to last year’s highs.  Any move by Trump towards protectionist trade policies in the US would impact Japan both directly through its own trade relations with the US and indirectly given the impact on China while any increase in geopolitical tension would also likely underpin the value of the yen.”