Japanese yen likely to appreciate towards 108 by end-2017, says Lloyds Bank

After the increased geopolitical tension around developments in North Korea in April, the Japanese currency advanced from ‘haven’ flows. This boosted the yen to a new year-to-date high against the U.S. dollar to about JPY 108. But in recent weeks, de-escalation in the region, along with equity markets rallying back towards their record highs, has seen the yen cede some of its strength, noted Lloyds Bank in a research report. The U.S. and Japanese monetary policy outlooks have been well communicated by the respective central banks.

The U.S. Fed has implied that it would carry on with its path of interest rate normalization. The Fed is expected to further hike its interest rate twice in 2017. Meanwhile, the BoJ is expected to stay committed to yield curve control. Given that it continues to be well short of achieving its inflation target, this is expected to remain the case for the near future. Positioning in USD/JPY is at neutral levels relative to history, and this might result in a period of consolidation. But fundamental models imply that the yen is still undervalued.

“We expect it to appreciate towards 108 by end- 2017 and 105 by end-2018”, added Lloyds Bank.