Brazil Cuts Selic Rate to 14% as Inflation Eases but Risks Persist 
RBI Holds Repo Rate at 5.25% as Inflation Risks and Global Uncertainty Persist 
China Holds Loan Prime Rates Steady for 14th Month as Economic Recovery Remains Uneven 
Fed Holds Interest Rates Steady as Kevin Warsh Says Rising Treasury Yields Tighten Financial Conditions 
Singapore Central Bank’s Exchange Rate Policy Explained: Why MAS Uses the S$NEER Instead of Interest Rates 
BOJ Rate Decision in Focus as Sticky Inflation, Weak Yen Shape USD/JPY and Nikkei Outlook 
Australia Inflation Cools as Core CPI Misses Forecasts, Easing RBA Rate Hike Pressure 
On the macro side, with the chorus of hawkish commentary by the Fed officials, the market has priced in a March hike immediately. Given that, widening U.S.-Japan yield spreads have brought USDJPY higher and the pair is now reaching the upper end of its trading range since mid-January. We now expect the Fed to deliver three hikes in this year (Mar, Jun, and Sep vs. May and Sep previously).
One important assumption of our bearishness on USDJPY is that a correlation between the pair and U.S.-Japan yield spread collapses with heightening concerns on political risks. Although it was the case early this year, the correlation has strengthened again as the U.S.-Japan summit and Trump’s speech to Congress passed without any troubles (refer above chart).
As a more harmonic U.S.-Japan relationship and a more aggressive Fed stance would mitigate downside risks to USDJPY to some extent, we revised USDJPY forecasts for end-June, end-September, and end-year to 111, 108 and 105 from 105, 102 and 99 respectively. We target 105 at end-March next year.
As the new profile suggests, however, we think factors mentioned above would not be influential enough to get USDJPY on a solid upward path heading to 120 or even higher, and still, expect it to track a modest downward trend in the medium-term.
