USD/JPY: Yellen's Dovish Comments Should Curb Uptrend – Deutsche Bank

USD/JPY: Yellen's Dovish Comments Should Curb Uptrend – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, notes that the Fed Chair Janet Yellen remarked, "I consider it appropriate for the Committee to proceed cautiously in adjusting policy."

Key Quotes

“The markets no longer expect a rate hike next month, and speculation over multiple rate hikes this year has receded considerably. A dovish stance by the Fed would not gratuitously bolster share prices or send the USD/JPY lower at a time when the US economy is solid.

However, if the Fed is perceived to be reverting to a dovish stance due to sluggishness in the economy, the USD/JPY should fall. Additionally, at a time when the US economy is weak, an emphasis on the risks of Chinese uncertainties and lower oil prices to the global economy can spark an equity downturn and yen upswing. The DB Nowcast Index compiled by our Japan economist suggests that the US economic momentum remains weak, though the pace of decline has eased somewhat.

Japan passed its FY16 budget yesterday, and Prime Minister Shinzo Abe announced that he wanted to begin implementing it immediately in order to boost the economy. Speculation has arisen again over fiscal policy, a postponement of the consumption tax hike and monetary easing ahead of the G7 Summit in Japan in May and the Upper House election in July. Japanese policy action may help the stock markets to some extent but is unlikely to have much weakening impact on the yen if the US economy is slowing.

A detailed look at US indicators suggests that the economy is unlikely to turn decidedly back upward anytime soon. We expect the data to remain patchy for now, and believe the economy overall, while firm, will continue to lack upward momentum. Still, we do not rule out the possibility of renewed recession fears in the US emerging gradually or sparked by external factors, such as China.

From a supply/demand perspective, institutional investors, along with pensions and importers, may well raise their USD purchasing in their new fiscal year allotments in the face of NIRP if the markets should remain in a lull. However, we suspect they will continue simply to buy cautiously on dip. At the same time, we believe exporters will lower their internal base USD/JPY rates to around ¥110 and lower their hedge selling levels (from around ¥115 or higher).

In light of these facts and US economic trends, we maintain our view that the USD/JPY that there is less risk of a rebound to over ¥115 than a drop below ¥110. We are watching any weakness in US payrolls or other key US data and a reaction after the brief rebound in stocks and oil as negative triggers.”

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