Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the prospects for sluggish growth in the US economy have increased and their economist has lowered US GDP growth rate forecasts for 1Q, 2Q, and 3Q 2016 to 0.5%, 1.0%, and 1.2% respectively. Key Quotes “We expect the Fed to postpone policy rate hikes during this period. We had to accept implication from this outlook that the USD/JPY would lose the most important support in ongoing risk-off. Furthermore, globally, markets have crossed the threshold into an adverse cycle. This could require joint action by leading countries instead of a waiting autonomous market recovery. We think the yen, as a creditor-country currency, could easily strengthen as the risk-off trend deepens in the adverse cycle. We doubt that the BoJ’s policies can sustain yen depreciation in a global risk-off environment. The yen-weakening effect from the BoJ’s minus interest rate policy was lost in just three business days, triggering instead a shift to stronger risk-off flows by investors. Japan’s institutional investors lean toward hedging (dollar-selling) ahead of fiscal-year account closings at end-March. We see short-term risk of the USD/JPY rate dropping below 110. However, letting the yen strengthen would be a setback for Abenomics. Japanese authorities could intervene in currency markets to defend around 110 level. We also cannot rule out the possibility that China will devalue the yuan by about 10% in an effort to alleviate future instability. In this case, we would first expect increased risk-off flows in EMs (including Asian countries) and resource markets, which could spark further yen appreciation. Over the medium term, it is difficult to tell whether the current storm will be temporary or sustained. However, coordinated policies by leading countries could alleviate excessive pessimism. Our economist team sees US GDP growth to resume at a roughly 2.5% pace from 4Q 2016 to 2017, and the Fed to raise the policy rate each quarter. If this outlook comes to fruition, we would like to have hopeful expectation that the USD/JPY could recover some lost ground, supported by steady outward investment by Japanese investors in the negative interest rate environment. However, we expect downward risk to stay dominant for the time being, and USD’s appreciation will strengthen risk of the yuan devaluation. We have to say this a bit optimistic medium-term outlook is just provisional.” For more information, read our latest forex news.