FxWirePro: Driving forces of revision in USD/JPY Q4 projections, Japanese politics and North Korea –the epicenters of Yen’s softness
USDJPY has surged from the lows of 107 levels to the recent highs of 113s. The US dollar has been crawling ahead in recent days, with the market-implied probability of a December Fed hike inching to around 80%.
During the period, JPY underperformed within the G10 camp and lost roughly 3% in nominal effective exchange rate terms. Meanwhile, USD appreciation also contributed to the rise in the pair; USD gained about 2.5% in nominal effective exchange rate terms. JPY depreciation was notable amid firm global risk sentiments due to receded concerns for North Korea developments and expectations for US tax reforms.
For the coming month, the main focus for JPY will be a snap election which will be held on Oct. 22. The outlook of the election result became less certain with Tokyo Governor Koike’s formation of a new party, the Party of Hope. Tokyo Governor Koike and her regional party Tomin First no Kai scored sweeping victory in Tokyo Metropolitan Assembly election in July this year. Political situations are still quite liquid and we continue to see new developments since the announcement of the snap election. The DP, the largest opposition party, decided to join the Party of Hope, and more recently Edano who contested the last leadership election of the DP left the party to establish another new party, the Constitutional Democratic Party of Japan (CDP).
With respect to possible market reactions to the election result, we think the yen would strengthen more than 5% if the LDP-Komei-to coalition fails to get a majority; the yen would strengthen a few percent if the LDP fails to get a sole majority; and the market would be hardly affected in our main scenario in which the LDP-Komei-to coalition gets a stable majority.
While issues over North Korea also continue to be the factor for strengthening the Yen, we also recognize that the Yen’s top-side is heavy. We think the reasons behind the softness in JPY are Japanese corporate FDI and overseas portfolio investments (see notes on Sep.8 and Sep.13). Japanese corporates accelerate FDI between Jan. and Jul. this year and net- FDI recorded +77% increase compared to the same period of last year. Japanese investors net-bought foreign stocks more than ¥1trn of foreign stocks in the last 4 consecutive months.
While we need to be cautious of knee-jerk JPY appreciation from time to time, JPY’s topside is likely to be limited by those flows. Therefore, we revise down our JPY forecast; our end-year USDJPY target is now at 109 (revised up from 107) and the target of 2Q18 is now at 107 (revised up from 105).
The FOMC minutes and US CPI data this week will be in focus. Fed Chair Yellen is also scheduled to speak on monetary policy this weekend, while ECB President Draghi will be part of a panel on “Rethinking Macro Policy” on the sidelines of the IMF-World Bank meetings. The FOMC minutes, US CPI and Yellen speech will provide crucial signposts for the ongoing dollar rally. Aggressive dollar bulls to positive on USD in the near-term, given our view that the market continues to underprice the probability of a December Fed hike. Courtesy: JPM
Source: FXWire Research