Once The Fiscal Euphoria Fades, Buy The JPY Again - Deutsche Bank
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Following Friday’s BoJ disappointment, yen bears are hoping for compensation from Abe’s cabinet tomorrow. Abe has already pre-signalled a stimulus package worth ¥28trn, around half of which in fresh fiscal outlays, and the government now has an incentive to deliver an even larger package, if only cosmetically. But in our view the BoJ’s apparent reluctance to coordinate fiscal-monetary policy more closely means that fiscal easing stands little chance of weakening the yen irrespective of the size.
...Once the fiscal euphoria fades, we believe there are only reasons to buy the yen.
First, positioning has lightened up considerably since early June.
Second, valuation is extremely favourable with the yen still trading around 10% too cheap across our models.
Third, Japanese investors and corporates remain under-hedged and are likely to use the tightening in the cross-currency basis to raise hedging ratios, especially as spot approaches 100 again (chart 2). And lastly, the current account remains supportive.
All things considered, we would sell any squeeze in USD/JPY if Abe were to announce a larger fiscal package than expected.
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