USD/JPY pair likely to move back towards 105 by 2016-end, 110 by 2017-end

Since the Japan’s policy makers made marked changes to their monetary and fiscal stances, the Japanese yen has been amongst the most volatile of currencies. Significantly, the Bank of Japan was unsuccessful in impressing the market after it delivered a modest stimulus package during its meeting in July.

The central bank added JPY 3 trillion in ETF purchases to current measures, while keeping both the asset buying target and policy rate on hold. The currency pair USD/JPY collapsed to about 101 from 105.5, noted Lloyds Bank in a research report. Japan’s Prime Minister Abe, on the fiscal front, announced a package of JPY 28 trillion in order to stimulate growth.

Data released recently underpins the requirement for such measures. Inflation and inflation expectations are weak, while retail sales came in below expectations. Moreover, manufacturing PMI continues to be in contraction territory.

The recent non-farm payrolls data of US has also sparked the possibility of the US Fed hiking interest rates in 2016. Admittedly, the US Fed is likely to hike by 25 basis points in December, said Lloyds Bank. Given this, along with the historically extreme long JPY positioning, there seems to be scope for USD/JPY upside in the short term.

“We forecast the pair to move back towards 105 by end-2016, and 110 by end-2017”, added Lloyds Bank.