Dollar index hits gradually ceiling, bearish USD/JPY looks set to continue – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that they think USD/JPY will remain bearish provided robust US economic trends continue while strong-dollar theme is likely to fade somewhat into next year.

Key Quotes

“Our new euro-dollar forecasts are 1.17 at end-2017 and 1.20 at end-2018. While US economic data have been soft, early improvements in the eurozone economy cause the ECB to feel its way toward policy normalization. Our switch to a bullish EUR/USD forecast signals our belief that the strong-dollar theme, which has formed the core of our market view since 2012, will fade somewhat into next year.”

“However, we do not think the upcycle for other G10 currencies will necessarily be in sync against the dollar. We think USD/JPY will remain bearish provided robust US economic trends continue. Our economists see that the US economy for a coming few years will keep growth above cruising speed, driven by deregulation and smaller-scale fiscal policy initiatives. We expect USD/JPY to rise to 115-120 as US medium- to long-term yields gradually rise in line with US rate hikes and an increase in European bond yields.”

“Based on eroding strong-dollar theme, we slightly adjust our dollar-yen forecasts to 116 at end-2017 and 120 and end-2018. In Japan, fears that a further drop in approval ratings for the Abe administration could result in BoJ policy instability may cause stocks to fall and the yen to rise. Still, there is no opposition force capable of replacing the current government in the Diet. We maintain our main scenario for the Abe government to remain in power, and for BoJ policy that supports bearish dollar-yen sentiment.”

“We may conceivably see a period of short-term strength in the currencies of countries with hawkish central banks, such as Canada, the UK, and New Zealand, and in resource-exporter currencies that are benefiting from commodity market resilience in line with the ceiling for the dollar index. In most cases, we think it is too early to see this as the beginning of an sustainable uptrend. However, we think tactical yen shorts versus these cross currencies (as well as USD and EUR) may be appealing at some points amid ongoing bearish sentiment on the yen.”