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The Japanese Yen has reconnected in its correlation with US 10Y Treasury yields, making EUR/JPY a function of USD/JPY, explained analysts at Danske Bank. They see higher US yields as support for EUR/JPY in the short-term but they expect that to be temporarily countered by the weaker cyclical picture in the Eurozone. They forecast EUR/JPY at 130.90 in 3M, 137.76 6M and 143.36 12M.

Key Quotes:

“GDP growth momentum in Japan eased in Q4 17, and Q1 data was also to the weak side with annualised GDP growth at -0.6% q/q after 0.6% in Q4. Recent oil price increases will cause higher inflation in the short run but also deprive consumers of purchasing power. Excluding fresh food and energy, inflation still stands at just 0.5% y/y.”

“The Bank of Japan kept its monetary policy unchanged in April as expected. The BoJ removed the reference to hitting the 2% inflation target in the fiscal year 2019. This is an interesting change and a clear indication that the BoJ expects it to take longer for inflation to reach the 2% target. In our main scenario, we expect the BoJ to keep its current yield curve control unchanged for the next 12 months.”

“USD/JPY remains highly correlated with the 10Y US treasury yield and the combination of neutral speculative JPY positioning and higher US 10Y yields could be a supporting factor also for EUR/JPY. Meanwhile, the cyclical picture in the eurozone is likely to counter the neat-term upside potential for the EUR/JPY, which we expect will range trade in the coming months before heading higher.”