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Deutsche Bank strategists continue to see USD/JPY biased to the downside. They forecast USD/JPY at 110 by mid-2019, 105 by end-2019 and at 100 by end-2020.

Key Quotes:  

“We revise our forecast path for USD/JPY slightly higher, and push back the timing of reaching 100 to 2020. However, we continue to be biased for a lower USD/JPY for three main reasons. First, the Japanese remain very long USD assets from stocks, to bonds, to credit, to equity stakes. Holdings would be vulnerable to a US risk asset correction, weaker US growth, or a softer USD, with hedge ratios historically low. Given this, the risk of a squeeze lower in USD/JPY appears greater than chances of a benign trend lower. Second, Japan may shift to reducing emphasis on their 2% inflation target, with recent Finance Ministry comments notable. If the US is simultaneously transitioning to tolerating above 2% inflation, this would suggest higher real rates in Japan, alongside lower real rates in the US which should weigh on USD/JPY. Finally, the focus will shift more to US-Japan trade relations in the coming months. To the extent that currencies have featured in trade discussions with Mexico, Canada and China, further JPY weakness could become more politically challenging.”

“The risk to our view comes from continued JPY funding for carry trades, M&A activity with Japanese companies cash rich, a radical shift by the BoJ towards more easing, or the GPIF raising the ceiling on their foreign bond allocations.”