The selloff in the JPY through the last weeks of 2016 surprised us and many within market; can it continue in 2017? The differential in bond yields between US and Japanese debt has been the main driver of this move but similarly so have moves in Japanese equity markets. There is a decent chance that should the sell-off in global debt slow in the early part of 2017 but expectations of additional QE from the Bank of Japan or stimulus from the Abe government could easily perpetuate a stronger Nikkei and therefore a weaker yen.
Carry trades have long used the yen as a funding currency for speculative investment and while we know that a lot of the recent USD strength has been funded by selling of the yen, we have to counter whether this can persist. Political pressures in the Europe and the UK could easily drive markets into using GBP and EUR as funding currencies for additional speculation, allowing the yen to recover.
The yield differential cannot be forgotten about however and with markets currently only seeing a 32% chance of two hikes by the end of 2017, there is room for the USD to mark its ground a lot higher than where it currently finds itself.
The Bank of Japan is likely to stay quiet in 2017 as we foresee little chance of USDJPY returning towards the 100 level that would engender an expectation of intervention.
USDJPY will likely trip over 120 in 2017 with an upward target of 125 if the markets continue to believe that Trump can implement the policies that swept him to power in November’s election.