JPY: Mounting speculative shorts - Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that they maintain their bullish stance on the USD/JPY for the medium term.

Key Quotes

“Data is pointing increasingly to steady growth not only in the US but in Europe, China and worldwide. Moreover, while geopolitical risk in East Asia has not been completely dispelled, uncertainty over G3 central bank staffing and policies has retreated somewhat. These favorable conditions have buoyed stock markets to new highs. We believe this is reinforcing the bullish outlook for the USD/JPY.”

“Still, the currency pair remains unable to break out of its ¥110-115 range. Foreign investors have been pouring into Japanese stock markets to correct their unduly low holdings. In contrast, the USD/JPY does not have momentum for that kind of buying. Buying on weakness by pensions and lifers at around ¥110 is a support factor, but we do not think it will be sufficient to drive a rally.”

“We expect the rate to try ¥115-120 in 2018 on the strong US economy and multiple Fed rate hikes, led primarily by overseas speculators. However, IMM data indicate that speculators have already accumulated a significant level of yen short positions. In the near term, the USD/JPY may become resistant to good news and could experience a technical correction.”

“We believe market participants will have to keep a close eye for now on both the ongoing uptrend and short-term correction risk. That said, even if the correction risk is realized (although USD/JPY may be corrected after it reaches 115s), we expect buying on weakness by domestic investors to underpin the currency at around ¥110. We continue to recommend a tactical long position in line with the bullish medium-term USD/JPY outlook.

The meeting between the US and Japan leaders today looks to concentrate mainly on North Korea, US-Japan trade and the South China Sea issue. We do not anticipate any big surprise for USD/JPY markets but should monitor events for safety's sake.