USD/JPY: Junction in October – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the USD/JPY is nearing a key technical junction: will it trend flat at just over 100, or will it fall into the mid-90s?

Key Quotes

“Topside is being capped by hedge selling mainly by Japanese exporters. Exporters' internal hedge rates have been adjusted from 105 or 110 in 1H of this business year to 100 for 2H (starting from October), which has gradually lowered the cap level to below 100.

On the other hand, a level of around 100 has been supported by dip-buying by Japanese pensions, some lifers and importers. As speculators have been unsuccessful in breaking through 100 on several occasions since June, this level has spurred their "hit & run" tactic of rewinding some short positions, thus reinforcing 100 as a floor. Also, seeing that there would be considerably larger room on the downside for the USD/JPY, speculators still have the large short positions. So they easily unwind a part of the position sensitively to head-wind factors such as verbal interventions by Japanese authorities, which makes the USD/JPY rebound temporarily but

However, sandwiched between this buying and selling, the USD/JPY is approaching the apex of the triangle formation at just above 100. If the market sees any kind of serious activity during October, we see a strong likelihood of a downward break to the 90 level. For example, the USD/JPY's downward movement will naturally likely strengthen if Friday's US employment data is soft. However, while it may rebound temporarily if non-farm payroll figure is strong (e.g., MoM growth of 250K or more), there is also a substantial risk of it falling back on disappointment with seeing limited upside.

We think the USD/JPY could move little if US non-farm payroll data shows solid but not overly strong growth of 150-200K MoM, and see that it might stay at around the apex of the triangle for some time. While it may move toward a formation like that of the stalled market just above 100 for February- August of 2014, uncertainty surrounding the US presidential election, risk-averse factors simmering in financial markets suggest less likelihood of the USD/JPY trending undisturbed.

In the medium-term, we see the key condition for sustained support for the USD/JPY is that US economic confidence recovers promptly and to sufficiently strengthen the market expectation on multiple interest rate hikes. Without this condition, we think even further easing by the BoJ would not be effective in sustaining a weaker yen. Moreover, even if the likelihood of multiple US rate hikes increases, we think it would probably take several months for the market to factor this in. We estimate that it will be difficult for the USD/JPY to hold patiently above 100 until that time. Our end-2016 forecast is 94.”