Forex Institutional Research: Deutsche Bank FX Daily

Forex Institutional Research: Deutsche Bank FX Daily

Key quotes from the Deutsche Bank FX report: 

Japan FX Insights

We released our bimonthly revised G10 currency forecasts last week (12 May, “FX Forecasts and Valuations”). While our basic theme remains a strong dollar, we trimmed our dollar growth projections versus most currencies. Noting the sluggishness in the US economy and the chance that the Fed may forego another rate hike until after the presidential election, we reduced our end-June and end-September forecasts to ¥103 and ¥101 (previously: ¥105 and ¥109). We reiterate our view that the USD/JPY should return to the over-¥110 level next year in line with our economist’s forecast that the US economy should rebound to over 2% growth. Still, we are cautious of downward risk for the short-run.

This week’s first focus will be Japan’s preliminary GDP estimates for 1Q 2016 on Wednesday. The average forecast on the growth is around 0%. Prime Minister Shinzo Abe is expected to announce a fiscal stimulus package early next month and shelve the consumption tax hike currently scheduled in April 2017. Still, we cannot envision any outbreak of risk-on weak-yen sentiment amid the mild domestic recession.

The second focus is the meeting of G7 finance ministers and central bankers this Friday and Saturday. Few market participants expect an agreement to coordinate macroeconomic policy, while USD/JPY markets could respond nervously to any warnings or disapproving comments against a currency devaluation war from the US or non-Japan nations.

The biggest point for the USD/JPY remains the slowing growth in the US economy. We expect a slight rebound in this week’s US housing data (building permit, starts, sales and NAHB index), industrial production and CPI.

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The USD/JPY may not experience any sudden intensification in downward pressure given the expected steadiness of US statistics this week and the vast volume of speculative yen longs remained in the market. Still, we believe the rate will likely drop below ¥105 in the coming weeks amid the risk of a US economic slowdown, fallback in risk markets, China concerns and constraints on Japanese forex intervention.

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