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The dollar has lost further ground as the 10-year Treasury yield drops further in both nominal and real terms, outright and relative to the average of the DXY basket. USDJPY has tumbled from the highs of 118.662 levels to the current 111.232 levels in last 9 and a half months.
EURJPY surges from the lows of 114.851to the current 133.055 levels since April 2017. The biggest barriers to further euro gains in the near term is the speed of its gains so far and the associated long euro positions that have been put on.
Weak US yields supporting yen. In our mid-year forecast update, we identified three threats to our forecast of USDJPY reaching 115 this month and 120 by year-end. They were that the BoJ joined in the global policy normalization, that bond yields and interest rates stayed lower for longer than expected, and an outbreak of broader risk aversion, for some reason as yet unknown. The BoJ has maintained its course but won’t forever. The Korea missile crisis has boosted the yen at times, and yields have definitely been lower for longer that most expected.
So, two out of three. Of the three, the one that affects our forecasts most is the lower trajectory for US yields. That caps USDJPY by reducing the effectiveness of the BoJ’s yield-suppressing policy.
Limited USDJPY upside: In the longer run, the Japanese economic recovery will see the BoJ change course eventually, in our view. The 10-year JGB yield won’t be around zero forever. As we edge closer to the end of the Fed hiking cycle and closer to a cyclical downturn in US yields, USDJPY will likely eventually move towards fair value and probably overshoot. But that is still in the future as Japanese inflation remains moribund.
Higher global yields remain key: But for now, we think the BoJ can squeeze a little more weakness out of the yen if we’ve seen the bottom of a trading range in US yields. As for the yen’s safe-haven credentials, they won’t go away, but a stronger yen and weaker KRW and TWD make a challenging mix as a reaction to events in North Korea. We don’t think this particular geopolitical challenge will support the yen much if we get back to a world of rising bond yields.
