USD/JPY: Low 110s offers good tactical dip-buying chance even amid bullish conditions – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the firmer US and global economies has bolstered their view that the USD/JPY will top ¥115 over the medium term.

Key Quotes

“The rate presently remains in a ¥110-114s range despite the record-breaking levels of Topix in the current cycle. Foreign investors have poured into Japanese stock markets with the recent rally in order to correct their underweighting of Japanese shares. At the same time, Japanese institutional investors continue to buy the dollar on weakness in forex markets and do not look to be a driving force for an upswing behind ¥115.”

“We believe the USD/JPY will repeatedly try the upside at ¥115-120 as the Fed raises rates, which we expect once in December and three more times in 2018. We expect overseas short-term speculators to be the main drivers. A speculation driven uptrend in the USD/JPY could be accompanied by significant volatility. We would recommend not a strategic long USD/JPY position but a tactical combination of repeated buying on weakness and partial profit-taking when the markets rise.”

“We expect robust growth in US non-farm payrolls this Friday in a rebound from the effects of the hurricane the previous month. While these factors are unlikely to boost the USD/JPY immediately, they in any case will not hurt the rate.”

“The short-term risks for USD/JPY bulls is a correction on frustration that the rate has failed to exceed ¥115 despite the accumulation of speculative long positions over the past 1-2 months. Still, if such buying on weakness materializes, Japanese institutional investors can move more aggressively to purchase at the level close to ¥110. This development would enhance the performance of our recommended tactics of buying the USD/JPY on dips.”