7 Jan 2016
USD/JPY downside risk likely to be limited - Nomura
FXStreet (Bali) - USD/JPY downside risk is likely to be limited, notes Yujiro Goto, FX Strategist at Nomura, noting that mid-term flows remain large net JPY selling in 2016.
Key Quotes
"USD/JPY started trading weakly at the beginning of the New Year, undercutting 120 today. Risk sentiment weakened as concern over the Middle East increased and Chinese economic data weakened further, which likely led to further unwinding of USD/JPY long positions."
"However, JPY short positions at IMM had already reached $3.1bn by 22 December. We estimate JPY short positions to have declined further to $1.4bn by 28 December, and JPY short positions are likely at almost neutral levels after today’s JPY appreciation."
"As the rate differential between the US and Japan continues widening, USD short positions against JPY are getting less attractive from a carry perspective. After JPY short positions are unwound, USD/JPY depreciation should slow. In addition, mid-term flows remain large net JPY selling in 2016, in our view. From a supply-demand perspective, we see only limited downside risks for USD/JPY from the current level."
"Over the weekend, Nikkei also reported that the BOJ may further delay the target for achieving 2% inflation goal unless there is a rebound in oil prices (unconfirmed). It also reported that the Bank’s FY2016 core CPI forecast would be lowered further to about 1% from 1.4% at the next meeting."
"As the major reason for the likely inflation forecast downgrade would be lower oil prices, the downgrade may not lead to imminent easing. The consensus forecast for FY2016 core CPI has been already lowered to 0.92% so a possible downgrade to about 1% by the BOJ would not be a surprise."
"Nonetheless, market-based inflation expectations continue to decline as oil prices decline. Wage negotiations are set to start soon, and the BOJ’s concerns over the negative impact of lower inflation expectations and JPY appreciation on wage formation may rise again, which would also limit the downside risk for USD/JPY, while market expectations for imminent BOJ easing are already subdued."
Key Quotes
"USD/JPY started trading weakly at the beginning of the New Year, undercutting 120 today. Risk sentiment weakened as concern over the Middle East increased and Chinese economic data weakened further, which likely led to further unwinding of USD/JPY long positions."
"However, JPY short positions at IMM had already reached $3.1bn by 22 December. We estimate JPY short positions to have declined further to $1.4bn by 28 December, and JPY short positions are likely at almost neutral levels after today’s JPY appreciation."
"As the rate differential between the US and Japan continues widening, USD short positions against JPY are getting less attractive from a carry perspective. After JPY short positions are unwound, USD/JPY depreciation should slow. In addition, mid-term flows remain large net JPY selling in 2016, in our view. From a supply-demand perspective, we see only limited downside risks for USD/JPY from the current level."
"Over the weekend, Nikkei also reported that the BOJ may further delay the target for achieving 2% inflation goal unless there is a rebound in oil prices (unconfirmed). It also reported that the Bank’s FY2016 core CPI forecast would be lowered further to about 1% from 1.4% at the next meeting."
"As the major reason for the likely inflation forecast downgrade would be lower oil prices, the downgrade may not lead to imminent easing. The consensus forecast for FY2016 core CPI has been already lowered to 0.92% so a possible downgrade to about 1% by the BOJ would not be a surprise."
"Nonetheless, market-based inflation expectations continue to decline as oil prices decline. Wage negotiations are set to start soon, and the BOJ’s concerns over the negative impact of lower inflation expectations and JPY appreciation on wage formation may rise again, which would also limit the downside risk for USD/JPY, while market expectations for imminent BOJ easing are already subdued."