USD/JPY Around 110 a Prime Sell Opportunity for Japanese Hedgers – Deutsche Bank

USD/JPY Around 110 a Prime Sell Opportunity for Japanese Hedgers – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, notes that as expected, the Sendai G7 meeting of finance ministers and central bank governors only put together a compromise agreement on macro-policy coordination.

Key Quotes

“Member nations took the position of looking at fiscal policy in terms of their individual circumstances. We think this week's Ise-Shima G7 summit on 26-27 May (Thu-Fri) could also adhere to this agreement, and believe its significance as a market event has declined.

Turning to the USD/JPY, while friction between Japan and the US remains, there do not appear to have been notable problems at the G7 meeting. The USD/JPY's recovery to the over-110 made Japan less sensitive regarding “one-sided” rise in the yen.

Market interest is turning to US rate hikes again. The minutes of the April FOMC meeting last week confirmed that many members support a June rate hike, and attention was also focused on some Fed governors issuing hawkish remarks afterward. As a result, as substantial speculative USD/JPY shorts have been squeezed, we see the USD/JPY not to retrace so immediately.

However, the April FOMC statement and the Chairman's comments were much less hawkish. Now the market interest is focused on Ms. Yellen's remarks during her 27 May (Fri) speech. In addition, we think fundamentals are not solid enough to support sustainable recovery of risk markets’ Mar-Apr rebounds. If the Fed should further hike rates early, we might see serious risk-off situation again, as we saw around the first rate hike in Dec 2015.

While the USD/JPY is currently above 110 by unwinding of some speculative shorts, it is also capped on the upside by hedge selling by Japanese exporters that have set their in-house rate at 110. We see the USD/JPY moving toward 105 or lower again for coming months, and recommend that Japanese hedgers take advantage of this prime sell opportunity.

In Japan, some major lifers release their annual business reports on 26 May (Thu), which will offer clues regarding their overseas investment and hedging activities. Early next month, Prime Minister Shinzo Abe will likely make decisions on fiscal policy and whether to postpone the consumption tax hike. While how Japanese equities react will likely be the initial measure of how this supports the USD/JPY, the medium-term dominant factor for the USD/JPY is still a basic awareness of the US economy and interest rates.”