USD/JPY: 5 Reasons To Stay Bearish; En-Route To 95 In 3 Months
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1. What was actually delivered on the day was at the modest end of easing expectations, with the added distraction of new measures to improve banks' access to USD funding. This to us suggested a focus on technical micro rather than sweeping macro changes at last week's meeting, and by definition a lack of urgency to make transformational changes like "helicopter money".
2. The fiscal announcement this week has been on the light side of expectations (link). It's certainly not large enough to really move the dial materially on growth, being worth according to the government less than 1.5% of GDP cumulatively over 3 years. Even if fully monetized, this does not seem exciting to us. This kind of "helicopter money" would be more in the category of amounts a small toy helicopter owned by a 10-yearold could dispense rather than the military attack version markets seem to envisage.
3. The review of monetary policy set for 20-21 Sep has two-sided risks attached to it. While it's still possible that the BOJ will use the occasion to announce a dramatic new easing framework with JPY-negative consequences, it is just as likely the central bank will try to use the occasion to frame a new approach that allows it to implicitly walk away from taking sole responsibility for creating 2% inflation in a short time frame. If markets take this view, that would open up a lot more downside tail risk for USDJPY. Certainly the recent sharp move higher in JPY rates suggests the market is now more cognizant of this risk.
4. Weak US data and an apparently dovish Fed rate stance arte hurting the greenback across the board.
5. Political risk going into Q4 will be concentrated in the euro area (Italian referendum) and the US (Presidential election), leaving JPY as a relative safe haven.
Taking all these together, we see reasons to become still more bearish on USDJPY on a 3m time horizon. We revise our 3m forecast to 95 from 100 previously. For now, we keep the 12m forecast unchanged at 95.
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