USD/JPY likely to transition higher – BAML

FXStreet (Barcelona) – FX Strategists at BofA-Merrill Lynch, see chance of further easing in Japan as inflation is expected to fall short of BoJ’s expectations, which would push USD/JPY higher.

Key Quotes

“The following implications can be made. (1) Kuroda BOJ believes the current exchange rate to be sufficiently reflationary for now and that speculative yen sell off not supported by fundamental catalysts are not desirable. It is our best guess that high 110s to around mid-120s for USD/JPY to be the current “comfort zone” for the BoJ. (2) But the BOJ’s policy response is asymmetric. It is much more likely to respond to yen appreciation with actual policy response, making the range floor firmer, but it would probably accommodate yen depreciation if it were supported by fundamentals, making the range ceiling looser. The hurdles to actual policy response to tame yen weakness are extremely high.”

“Our basic scenario is that USD/JPY will hover in the USD/JPY120-125 range for the time being as Kuroda may prefer near-term FX stability and as long-term policy divergence may take time to manifest itself due to 1) the crowded yen short position, 2) potential risk market correction on the normalization of US monetary policy, and 3) the current level of USD/JPY partly pricing in the future policy divergence.”

“The range is likely to transition into USD/JPY125-130 in 2h15/1H16 as we forecast USD/JPY at 125 by year-end and rise further in 1H16.”

Risk is to higher USD/JPY

“Our risk scenario is that inflation falls short of BoJ’s outlook, prompting the BOJ to launch another round of monetary easing. In that case, we believe USD/JPY above 130 would become likely sooner.”

FX Strategists at BofA-Merrill Lynch, see chance of further easing in Japan as inflation is expected to fall short of BoJ’s expectations, which would push USD/JPY higher.

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