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The Credit Suisse analyst team 103 target for USD/JPY remains in play due to negative real US rates and the relative cheapness of hedging long USD risk today relative to historic precedent. The absence of the Bank of Japan (BoJ) from the easing table is another important factor.

Key quotes

“In FX markets, the clearest manifestation of pricing for US election risk can be seen in USD/JPY implied volatility. The two-month tenor which covers 3 November is showing a relatively high premium to the one-month tenor, especially in comparison to other crosses.

“We suspect pre-existing wide use of short USD/JPY risk hedges may be one reason why USD/JPY spot has performed well recently. Nevertheless, longer-term we see an inevitable grind towards our USD/JPY 103 target unless US real yields move materially higher.”

“In the past two years, Japanese portfolio asset purchases have picked up again, especially for USD assets. But flows of late have been more mixed. What has changed fundamentally is the cost of short-term hedging. Assuming these can be constantly rolled over, the incentive to hedge FX risk is now greater for Japanese investors given collapsed short-term rate differentials.”