JPY: Appreciation Nearing An End; BoJ To Ease Further In April Or June - Credit Agricole

JPY was among the biggest beneficiaries from the latest USD selloff in the wake of the dovish Fed March meeting. We believe, however, that JPY-appreciation may be nearing an end.

Indeed, we note that that JPY strength is increasingly at odds with the improvement in risk sentiment. The latter driver is seemingly already driving portfolio outflows from Japan that should ultimately weigh on JPY. In addition, there is a growing discrepancy between the weak USD/JPY and the still elevated USD-JPY 2Y rate spread. When we plug in risk sentiment and rate spread into an FX valuation regression model, we conclude that, at present, USD/JPY is pretty undervalued.

The USD-JPY rate spread could widen further and USD/JPY recover if next week’s Japanese inflation data disappoints again, and encourages bets on further BoJ easing.

CACIB economists expect Governor Kuroda to announce another round of QE and further rate cuts into negative territory in June or even in April.

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