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JPY: Will the BoJ change tack? - Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 13, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that the yen is the best performing G10 currency this year by a decent margin, proving its status as a safe haven and as a consequence Japan’s effective exchange rate has been ticking higher, albeit from a low base.

    Key Quotes

    “The weakness of the exchange rate was likely a contributing factor behind the BoJ’s reluctance to signal any further expansion of QQE last year. Looking forward coincident strength of the JPY vs. both the USD and the CNY will translate into a tightening of monetary conditions in Japan at a time which is viewed by Japanese policy makers as a crucial moment in terms of the economy gaining the required momentum to maintain its ‘virtuous cycle’.

    Currently that view is looking optimistic with this year’s rout in China’s stock market and the falls in the value of the CNY vs the USD indicative of deeply rooted concerns of decelerating growth and weak price pressures in Japan’s largest export partner. The uptick in the value of Japan’s effective rate leaves Japan’s exporters more vulnerable to slowing growth in China.

    On the back of slowing growth and soft inflation in China, we have been arguing for further marked weakness in the value of the CNY vs. the USD this year. If the value of the USD/CNY rises significantly this year there is clear risk that the CNY may also lose ground against the currencies of several of China’s trading partners. This raises the risk that central banks in countries such as S.Korea, Australia, the Eurozone and Japan may be forced to retaliate by extending their easing cycles.

    While the value of the JPY is likely to play a crucial role in the determination of BoJ policy settings this year, Japan’s spring wage round will also be a pressing factor. Higher wages are a critical part of Japan ‘virtuous cycle’ since it is assumed that Japan’s record corporate profits will translate to higher wages. It is assumed that this will feed higher demand which will then lend support to inflation.

    Weak oil prices and a stronger currency will make 2% inflation all the more elusive and increase the chances that the BoJ is focused to increase stimulus in the months ahead. Assuming further BoJ stimulus we expect EUR/JPY to stabilise around 129 on a 3 to 6 mth view.”
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