When the Bank of Japan cut rates to negative, USD/JPY rallied. The gains are now gone. Deutsche Bank explains:
Here is their view, courtesy of eFXnews:
As USD/JPY has fallen again, Deutsche Bank is out with a note arguing that with the surprise BoJ impact having ended, the market is taking a more sober look at the BoJ policy.
“We think applying negative interest rates to a portion of the C/A deposit is unlikely to deliver a breakthrough in terms of meeting the 2% inflation target and overcoming global risk-averse symptoms. However, in terms of FX analysis, we saw it as effective in curbing JPY appreciation risk. There had been concerns of a worsening spiraling of risk-averse sentiment in the unlikely event of the USD/JPY falling below 115.
Adopting negative interest rates can preserve room for QE expansion and make further interest rate cuts possible, and thus puts in place measures to address risk-averse sentiment. It will also likely contribute to lower JGB yields and increase pressure for portfolio rebalancing to increase foreign bond purchases. These measures contributing to making the USD/JPY to stay in the 115-125 range is important for sustaining the uptrend,” DB argues.
“In the short term, some retracement of the USD/JPY following a rebound is within our expectations. This will likely present the first occasion to observe how Japanese investors move to buy on dips. While Japan investors are unlikely to become the drivers of a rally to and beyond 125, we can at least expect them to gradually strengthen their support again by dip-buying.
We see the USD/JPY recovering gradually within the 115-125 range, and look for a range of 125-128 in the medium term as a firm floor for US economic indicators and staged interest rate hikes work in favor of the USD/JPY,” DB projects.
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