JPMorgan sees dollar topping 140 yen as policy diverges more
The U.S. dollar will soon rise above 140 yen as the Federal Reserve possibly gets even more hawkish on rates while the Bank of Japan digs in its heels on ultra-easy policy, according to a forecast by JPMorgan strategists.
The dollar reached the highest since October 1998 at 135.60 yen on Wednesday, with markets now expecting the Fed to tighten policy by 75 basis points at a meeting later in the day and again next month, a scale of moves not seen since 1984.
Meanwhile, Bank of Japan Governor Haruhiko Kuroda has restated his commitment to massive stimulus several times this month ahead of a policy decision on Friday, and the central bank has ramped up bond purchase operations this week to keep long-term yields close to the zero policy rate.
“Assuming BOJ inaction and a hawkish Fed outcome, USD/JPY should be able to extend its rise toward the 140 handle over the near-term horizon, and our bias on the pair remains skewed higher,” JPMorgan strategists Benjamin Shatil and Sosuke Nakamura wrote in a note to clients.
The dollar is already trading at a 2-3 yen discount to where it should be based on yield differentials, “which have been the single most important driver of the pair over the past year,” because of the risk premium ahead of those two big events, they wrote, meaning it could snap higher on as-expected outcomes.
They also called the risk of full-blown currency intervention by Japan “overstated,” even though yen weakness had exacerbated price rises in gasoline and food before crucial upper house elections next month, because the catalyst had been the divergence in monetary policy rather than speculative bets.
“It is simply not a credible proposition to argue that intervention can halt the yen’s slide,” they wrote.
The real risk to yen short positions came from the potential for the BOJ’s capitulation on its ultra-easy policy, they said.
Speculators are challenging the central bank’s resolve to its yield curve control policy that pins the 10-year at zero by targeting futures and seven-year cash bonds, pushing them to multi-year extremes on Wednesday.
The JPMorgan strategists said the baseline view was that this week’s meeting would be too soon for such a shift, but that eventual “surrender” on YCC would trigger a spike in yields that in turn could lead to a 3-4% correction lower for the dollar-yen rate.
Source: Reuters (Reporting by Kevin Buckland; Editing by Edmund Blair)