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Analysts from Rabobank, expect USD/JPY to end the year moderately higher, assuming that the Federal Reserve hikes rates again in September and refuses to bow to political pressure.

Key Quotes:  

“This week’s disruptive effects have not all been initiated by the US President. The sharp drop in the value of the CNY could have huge global implications if allowed to continue. In the first instance, confidence in emerging market currencies is likely to be further undermined. In recent weeks the USD has been finding significant support on outflows from emerging markets, with the JPY playing second fiddle in the safe haven trade. Although President Trump comments have undermined the USD’s credibility, given our firm expectation that the Fed will stick to the script and hike rates again in September, we see USD/JPY at 113 by the end of the year.”

“Insofar as the USD is the best performing G10 currency on a six month view, it has appears as if the greenback has taken on the mantle as favoured safe haven currency. As long as the US economy is performing well and the Fed is the stand out hawk amongst G10 central banks there is good reason for investors selling EM assets to favour the USD vs. the JPY. While USD strength is the biggest factor behind the recent uptrend in USD/JPY, the relative softness of the JPY may also be explained by perceived difference between the type of risk facing investors.”

“Trump may be pleased that his comments this week on US interest rate policy have weakened the USD since this is, in the first instance, in tune with his desire to increase US exports. However, if he maintains a policy of meddling in monetary policy the results could be a significantly weaker USD and an undesirable bout of inflation which would likely result in higher than otherwise interest rates as the central bank struggles to restore credibility. In these circumstances, the USD would almost certainly lose its title as a safe haven currency and USD/JPY would take a leg lower.”