fxs_header_sponsor_anchor

News

US Reflation scenario is positive for USD/JPY – Danske Bank

Morten Helt, Senior Analyst at Danske Bank, suggests that the election of Donald Trump as the next US President has prompted a significant increase in US inflation expectations and base metal prices driven by expectations of a significant boost to public spending, including a large infrastructure spending programme.

Key Quotes

“The US yield curve has steepened significantly as higher inflation expectations have driven an increase in yields on longer dated US government bonds. USD/JPY has historically been highly correlated with yields on 10Y US Treasuries as a widening of the rate spread tends to support portfolio investments flows out of Japan and into the US. Our short-term financial model currently implies a fair value estimate of USD/JPY at 115.50 based primarily on the recent increaseinthe10Y US interest rate.”

“Moreover, USD/JPY carry has become increasingly negative with 3M FX forwards trading at the lowest level since 2008. This has made it more expensive for Japanese investors to hedge USD assets, which might eventually start to weigh on the JPY if Japanese investors lower USD hedge ratios as long USD/JPY becomes more attractive from a carry perspective.”

“Hence, if the US reflation theme continues to build a case for higher US interest rates, we see a case for further portfolio investment outflows out of Japan, which in a combination with higher FX hedging costs on USD assets is likely to weigh on JPY over the medium term.”

“Finally, we note that higher commodity prices, in particular higher oil prices, will be a negative for the Japanese current account, which has improved substantially over the past couple of years due to the combination of previous weakening of the JPY and the oil price decline. A weakening of Japan’s external balances implies less JPY appreciation pressure in the medium to long term.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.


RELATED CONTENT

Loading ...



Copyright © 2024 FOREXSTREET S.L., All rights reserved.