USD/JPY: To 107 or 122? Two opinions

Dollar/yen had a well-defined range during 2017 and it is now heading towards the top of that range. Where will it go next? Here are two different opinions.

Here is their view, courtesy of eFXnews:

USD/JPY: Three Reasons For More Upside In 1H Of 2018 – BofA Merrill

Bank of America Merrill Lynch FX Strategy Research discusses USD/JPY outlook in 2018, and believes the yen’s fundamental weakness will be maintained, but will manifest in USD/JPY rather than in cross-yen.

“There are three major factors we believe will maintain JPY’s weakness in 1H18. (1) BoP, (2) Portfolio flow dynamics, (3) US real yield increase. 

Higher US yields in 1H18 followed by higher JGB yields in 2H18 would lead to a USD/JPY rally in 1H18 followed by a correction in 2H18. Assuming the 10-year US yield rises to 2.9% led by the real yield, we expect the USD/JPY peak around 122 in 2Q18, and correct toward 115 by year-end,” BofAML argues.

In line with this view, BofAML targets USD/JPY in 2018 at 119, 122, 118, and 115, by end of Q1, Q2, Q3, and Q4 respectively.

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USD/JPY: Taking An Anti-Consensus View On JPY In 2018 – TD

TD FX Strategy Research discusses USD/JPY outlook in 2018 and argues that one of the underappreciated currencies for next year is the JPY. 

“Indeed, next year’s consensus of forecasters puts USDJPY at 115 against our forecast of 104. Many observers continue to focus on rate differentials (and levels) rather than the prospects of another regime shift that kick-started the move in the EUR this year.

Our longer-term valuation models argue that the JPY remains one of the cheapest currencies in the G10 while a huge balance of payments deficit underscore the massive stock of outsourced capital. The BoJ is likely to undergo extreme tapering next year against a backdrop of GDP running nearly 2.5x times its potential. This setup could usher in a new regime change, leaving JPY well-placed in G10,” TD argues.

In line with this view, TD Research maintains a short USD/JPY position* from 111.85 targeting 107, with a stop at 114.80.

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