Dollar/yen has rallied hard after Trump’s Triumph. The earthquake only slowed the move. What’s next? The team at Nomura lists reasons why things could change:
Here is their view, courtesy of eFXnews:
USD/JPY has rallied from 101 to 111 since President-elect Trump’s victory. USD/JPY’s performance in 2017 will clearly depend on his chosen policy. In the short run, however, we feel relatively bearish towards year-end for a number of reasons:
1) This rally has been mostly driven by short-term investors unwinding USD/JPY shorts and building long positions. But will they be comfortable to bring those USD bullish positions into the new year without knowing what Trump’s policy priorities are?
2) Fed funds futures have now priced in a December FOMC rate hike and 70-80% that there will be additional tightening in H1 2017. A further rise in US rates may require clearer information about US economic policies. We see the December FOMC as a “sell the fact” event.
3) president-elect Trump will announce his choice for Treasury Secretary soon. He/she will highly likely be asked to comment on the latest USD trends. Verbal intervention in our opinion will be much easier if done by a Treasury Secretary “prospect” not bound by the G7 rules.
4) The Italian referendum on 4 December may trigger concerns about European politics and financial stability. This may provide a good reason and/or opportunity to take profit on bank stock positions.
5) The importance placed on the Abe-Putin summit in Japan scheduled on 15-16 December seems to be losing some momentum. President Putin seems less in need of economic support from Japan as it seems he may benefit from a friendlier US foreign policy. President Abe is giving up his desire to hold a snap election in January as his approval ratings are somewhat disappointing. Without a near-term election schedule he loses some of the political incentive to achieve a laudable agreement soon.
6) The BOJ looks comfortable not taking action any time soon as Japan’s economic performance has improved.
All in all, looking into year-end, we believe USD/JPY will face a heavy ceiling around 112. Identifying the downside is tricky but we would expect to see buy-on-dip demand from Japanese lifers/pensions to underpin a 108 level. However, if this is not the case, we believe we could see it falling to 106.
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