The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.
This prompted a flurry of questions after the presentation, focusing on that bold prediction.
If that forecast was given at the start of this year, where the USD/JPY sat at 120, investors would think reaching 130 was quite plausible. At that time, there were abundant expectations for further yen depreciation on a combination of weak growth in Japan and massive quantitative easing.
However, the JPY gained over 10% to trade below 110 against the greenback. Many were caught by surprise of the ferocious strengthening of the yen. The haven demand of the JPY was remarkably strong.
Furthermore, the Bank of Japan (BoJ) imposed negative rates on some reserves banks held within the central bank This spooked concerns about bank profitability, leading to a selloff in Japanese equities. Typically, when a central bank implements monetary easing or negative interest rate policy, the local currency will weaken sharply. In the case of Japan and the Eurozone, this has not been the case, with the yen and euro proving to be resilient.
At the same time, market participants were trimming expectations that the Federal Reserve will raise interest rates this year, as a series of weak Q1 US data filter through. The resulting USD weakness powered JPY forward.
BoJ holds fire but remains dovish
The BoJ maintained current policy setting at the 15-16 June meeting, in line with expectations. Governor Kuroda reiterated that JPY gains which are not fundamentally driven are undesirable, paving the way for BoJ to intervene in the FX markets as needed. He stressed that the bank will not hesitate to expand stimulus if necessary, although he highlighted that the aim of monetary policy is not to target a certain level of exchange rate.
Ironically, the Japanese yen rallied to the highest since August 2014, breaching below 105 against the dollar. Investors seemed to be increasing their long bets on JPY, despite risks of further easing from the BoJ.