USD/JPY expected to slide below 110 in early 2019 - CIBC

Analysts at CIBC see the Japanese yen moving higher, rewarded in the months ahead as the Bank of Japan signals that the removal of monetary policy stimulus in 2019. They forecast USD/JPY at 110 in Q4 and at 106 in Q2 2019. 

Key Quotes: 

“We underlined last month three key reasons why we remain constructive on the JPY outlook: Japan’s large current account surplus, its net-creditor status and the BoJ’s stealth tapering. All of these represent a land of the rising sun for the yen in terms of a medium term appreciation ahead. The recent uptick in risk aversion could also see domestic investors stay within Japan in order to earn a return. Speculative JPY shorts have reached eight month highs, suggesting that there is scope for a short covering rally, which would lend further support to the yen.”

“While next October’s increase in the sales tax rate might give the BoJ pause, increasing evidence of rising price pressures will act to alleviate some of the associated uncertainty. Amidst reports of labour shortages, which suggest that higher wage inflation may be on the horizon, BoJ officials have become more open in discussing a policy change. Most recently, BoJ member Sakurai detailed that bond market distortions are the by-product of ultra-low rates. That adds to the narrative that while monetary policy tightening may not be urgent, it is forthcoming. That should lead the yen stronger, with USDJPY falling below 110 in early 2019.”