USD/JPY: How Far Will Flying On One Engine Get You? - Credit Agricole
USD/JPY: How Far Will Flying On One Engine Get You? - Credit Agricole
USD/JPY dropped sharply in response to the
BoJ’s policy inaction in April. The outcome eroded the market’s belief
that the BoJ will be easing anytime soon, if at all, and may argue for
further JPY appreciation.
We still think that policy divergence
could remain a USD/JPY driver even if it has to rely on only one engine
for now – the Fed tightening policy from here.
Below we assess
the impact on USD/JPY of the persistent widening of the USD-JPY rate
spreads expected by us and the (more dovish) market consensus. Our
results point at sustained USD/JPY strength ranging from 3% to 6% by
year-end 2016 and 10% to 12% by the end of 2017.
The results
suggest that the policy divergence implied from our rates forecasts
could push USD/JPY at 116 by end-2016 and 121 by end-2017. When using
the consensus expectations, the result is a very gradual appreciation to
111 by end- 2016 and 119 by end-2017.
If we were to relax
the above assumption and add some stock market outperformance,
presumably on the back of more government stimulus and/or further BoJ
easing, this changes the results to a degree. Assuming that Nikkei
revisits its recent highs around 18000 – a fairly conservative
assumption – it could lift our projections for USD/JPY to 118 by end-
2016 and 123 by end-2017. When using the consensus rates forecasts, we arrive at 113 by end-2016 and 121 by end-2017.
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