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Analysts at Danske Bank, expect the USD/JPY pair to bounce back above 112 if the Bank of Japan keeps its policy unchanged next week, but they see little potential for a sustained rally above July’s high at 113.17 in the near term.  

Key Quotes:  

“If we are right in our call that the BoJ will stay put next week, we expect USD/JPY to bounce back above 112. The past weeks’ rally (up until Friday’s sell-off) in USD/JPY has been out of sync with global risk sentiment and the US FI market, and the correlation between USD/JPY and 10Y US yields has collapsed as a pickup in Japanese foreign equity buying and a build-up in speculative short JPY positions in the FX market has been driving yen selling.”

“We doubt these effects will continue to support the cross in coming months, and taking FX positioning, the overall fragile risk environment and not least a continued risk of a BoJ policy change in Q3 into consideration, we see little potential for a sustained rally in USD/JPY above July’s high at 113.17 in the near term. We target 112 in 1-3M. Longer term, we still expect USD/JPY to remain underpinned by relative interest rates and continued global growth, targeting 114 in 6-12M.”

“If the BoJ hikes the 10Y yield target next week, JPY is likely to come under substantial appreciation pressure and we would expect USD/JPY to break below 108 in this scenario, driven by higher Japanese yields, short JPY positioning unwinding and rising expectations  of further BoJ normalisation.”