USD/JPY: After BoJ, still expected to trade in the 100/105 range - Danske

Analysts from Danske Bank see the USD/JPY  trading in the 100 - 105 ranges during the next months despite today’s Bank of Japan (BoJ) announcement.

Key Quotes:

“Although the BoJ probably under delivered on new monetary easing relative to market expectations, both equites and USD/JPY traded higher initially on the announcement. The main reason for this is because the BoJ did not cut interest rates, which is positive for banks. Hence, the risk channel was the main driver behind the move higher in USD/JPY. However, the rally in USD/JPY has faded quickly and, at the time of writing, USD/JPY has dropped back to 101.80 – the level before the BoJ policy announcement.”

“Focus now turns to the FOMC meeting tonight, where we expect the Fed to stay on hold. This is also priced into the market and thus should not be a big surprise. However, risk is probably tilted towards a more hawkish Fed, which could temporarily support the USD.”

“Overall, we continue to see USD/JPY in the range of 100-105, targeting 101 in 1M and 102 in 3M. On a 3-12M horizon, the prospect of a monetary policy surprise (either from the BoJ or the Fed) is low and while underlying support for JPY stemming from fundamental flows is likely to remain intact, we see the effects diminishing as the yen is no longer undervalued. Moreover, we note that speculative accounts, according to IMM, are very long JPY, suggesting an increased correction risk towards a weaker JPY. Finally, we expect the market to continue to price in a probability of a BoJ rate cut in the future, which will remain a supporting factor for the cross. We target USD/JPY at 104 in 6-12M.”