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The Bank of Japan is expected to disappoint relative to market pricing, implying that the currency pair USD/JPY is expected to trade lower when the central bank possibly keeps policy on hold next week. Momentarily, the pair is likely to fall back for a new test of the 100 level where it is likely to stabilize, said Danske Bank in a research note.
Some expect the Bank of Japan to ease next week; however, it is mostly related to the Quantitative and Qualitative part that are not much sensitive measures for the FX market relative to a rate cut, according to Danske Bank. Moreover, the U.S. Fed will also be announcing its policy the same day later in the evening, hence focus might rapidly shift from the BoJ announcement. The U.S. Fed is likely to be on hold, which is also expected by markets.
Therefore, given the low expectations from market regarding further rate hikes from the Fed, short-term valuations and positions, the JPY appreciation pressure is expected to lose momentum, according to Danske Bank. Also, in the absence of sharp deterioration in risk sentiment and significant drops in crude oil prices, USD/JPY is unlikely to break significantly below 100, added Danske Bank. On a one month and three month horizon, USD/JPY is expected to trade at 101 and 102 respectively. On a three to 12 month horizon, no strong case is foreseen for a trend in USD/JPY.
The prospect of a monetary policy surprise on the one side is low. And while the underlying support for the yen stemming from fundamental flows is expected to remain intact, the impacts are seen diminishing as the yen is no longer undervalued, stated Danske Bank.
“We expect the market to continue to price a probability of a BoJ rate cut in the future, which will remain a supporting factor for the cross. We target USD/JPY at 104 in 6-12M”, added Danske Bank.
