USD/JPY: GDP, employment and CPI are picking up in Japan, supporting yen outperformance – CIBC

Jeremy Stretch and Bipan Rai, analysts at CIBC, expect the USD/JPY pair to drop to 105 by Q4 19 and to trade at 103 by Q2 2020.

Key Quotes: 

“With signals of strengthening domestic fundamentals, such as falling unemployment and GDP growth inching upwards in Q1, we maintain a bias towards an outperforming JPY. In terms of market positioning, since the end of April, we have seen net negative JPY positional skew. The unwind in short holdings comes as trade tensions resumed and market risk appetite significantly deteriorated. However, despite the short bias being pared back to below the oneyear moving average, we expect the retreat to continue, should macro risk dynamics remain challenging into H2.”

“The positive correlation between the S&P index and USDJPY has witnessed a significant uptrend since last September. The advance underlines that any unwind in risk sentiment, likely a function of overpriced Fed rate assumptions, encourages JPY outperformance, in particular in several of the risk-orientated crosses.”

“Despite the BoJ pledging to take action as necessary, we expect BoJ policy inertia in the wake of the surprise bounce in Q1 GDP, driven in large part by unexpectedly resilient business investment. Should trade tensions continue to worsen, expect increasing debate pertaining to additional policy stimulus as markets fret about the impending hike in the consumption tax, though the room to manoeuvre remains limited.”

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