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Jane Foley, Senior FX Strategist at Rabobank, suggests that even though interest rate differentials should be supportive of USD/JPY in the coming months, they see risk that the currency pair could trade lower into H2 2019.  

Key Quotes

“This would likely be the result of a drop in risk appetite and reduced confidence in the outlook for the USD.”

“In theory, the BoJ’s soft monetary policy settings should undermine the value of the JPY vs. the USD. However, the unit’s safe haven appeal often overrules downward pressure on the JPY.   Consequently, potentially of more interest in determining the outlook for the JPY are the risks that the BoJ has outlined to its baseline scenario.”

“As it stands, the BoJ expects that Japan’s economy is likely to continue to expand moderately. From fiscal year 2019/20 the pace of this growth is expected to decelerate.   Also, the projected rate of increase in CPI inflation is somewhat lower than previously forecast, mainly for FY2018.”

“This year the JPY’s function as a safe haven currency has been diluted by the higher returns on offer from the USD. However, the risk of a worsening in the US/China trade war, slowing global growth and the potential for slowing US growth and a plateauing of Fed rates suggest that the JPY could win back some ground vs. the greenback next year.   We have lowered our medium-term forecast for USD/JPY and look for a move to 110 around the middle of next year.”