JPY – Yen


The rebound at the beginning of 2017 was only transitory, but will probably not be reabsorbed in the immediate term.

The yen opened 2017 on the rise, entirely recovering its December correction and appreciating against the dollar from a low in the USD/JPY 118 area to a high in the 111 area (+6%).

The recovery was mostly built on the widespread depreciation of the dollar, after the market had digested a stronger growth scenario in the US on the back of the more expansionary fiscal policy measures expected from the Trump administration. At the same time, the markets began to focus on the risk of protectionism, which had been ignored in the immediate wake of Trump’s victory. The possibility of the United States implementing a protectionist strategy poses a risk to the global scenario, fuelling risk aversion, which typically supports the yen.

In fact, in the opening weeks of the year the yen also appreciated against the euro, from EUR/JPY 123 to 119, recovering its December decline. As the euro also strengthened against the dollar in the same period (from EUR/USD 1.03 to 1.08), that the yen’s appreciation against the dollar was evidently stronger than the euro’s, and the Japanese currency’s relative strength against the single currency is explained by its positive correlation with risk aversion. Temporarily, or in any case at certain points in the course of the year, albeit mostly in the first half, the yen could again display relative strength against the euro, as a result of the political risk weighing on the single currency (widespread strengthening of populist-nationalist formations in favour of exiting the euro area) ahead of the elections in Holland, France, Germania and, possibly, Italy as well.

Beyond the near term, however, the underlying trend should be a weakening of the yen, against both the dollar (target of around USD/JPY 120) and the euro (target of around EUR/JPY 130). This is because at its meeting on 31 January the BoJ reasserted its intention to keep in place its “yield curve control” strategy – aimed at keeping yields persistently flattened on the zero mark (short-term policy rate at -0.10% and long-term rate at 0.00%) – until inflation will have reached (and surpassed) the 2% mark. Based on the BoJ’s updated forecasts, inflation is expected to rise from -0.2% in 2016 to 1.5% this year, and to 1.7% the next, generally considered a rather optimistic outlook. The scenario will be updated with new forecasts on occasion of the BoJ meeting on 27 April. Considering that Japanese yields will be anchored to around zero as a result of curve control, yield spreads should have a margin to widen further beyond the near term, against both US and euro area rates.

With respect to US yields, there is still an upside margin beyond the near term, despite their surge in the wake of Trump’s victory, as the market is pricing in two fed funds rate hikes this year and two the next, as opposed to the Fed’s baseline scenario, outlined in December, of three hikes this year and a further three in 2018.

For what concerns euro area yields, the upwards reversal observed in the past few months should be supported by the prospect of the ECB announcing, towards the end of this year, a tapering of purchases to be carried out in 2018.