FXStreet (Delhi) – Research Team at RBC Capital Markets, suggests that as we head into 2016, the question is not so much whether policy in the US will continue to diverge from that of most other developed countries (most agree it will), but whether that divergence can continue to drive broad USD strength. Key Quotes “We think it can, and we feel most secure in expressing that through USD/JPY. The two most frequently cited obstacles to continuing USD outperformance are historical precedent and the self-defeating nature of further USD gains through their feedback loop into Fed policy. We don’t think either is a convincing reason to abandon the overarching theme of USD outperformance. For two reasons, USD/JPY is our favoured way of taking on long USD exposure. Firstly, the underlying cause of USD gains – higher US rates – has the clearest transmission mechanism to JPY selling through readily identifiable flows that follow. Secondly, the case for independent JPY weakness on domestic factors alone would remain strong, even in the absence of tighter US policy. Since USD/JPY started rallying in late-2012, the key sectors that have driven the move have been leveraged investors outside Japan and public sector investors (GPIF) in Japan. A third sector – domestic private sector investors – have so far played little or no role in JPY weakness and their behaviour seems to have changed little as a result of the BoJ’s aggressive QQE policy. Ultimately, we think this sector will add to JPY selling pressure, but the timing has more to do with Fed policy than the BoJ. It is the involvement of this, third, sector that we think buys the next big leg up in USD/JPY. But even absent this, the general direction would be higher. The leveraged investors that drove the first leg of JPY selling now appear to be short USD. After the recent rally from 118 to 124, it may be prudent to wait for a pullback before entering a long spot position. We look to go long on a correction to around 121 to express our view that USD/JPY will ultimately rise to a new high of 132.” For more information, read our latest forex news.