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21 Feb 2014
Flash: Yen should continue to cheapen further - RBS
FXStreet (Bali) - Yen fundamentals have worsened significantly, notes Greg Gibbs, FX Strategist at RBS, who supports the idea of further USD/JPY upward pressure.
Key Quotes
"Worries over possible risk aversion argue against a short JPY position. However, the rapid deterioration in the external balance and widening in the real interest rate differential in favour of USD/JPY suggests pressure should build for it to rise to new highs."
"5yr break even inflation expectations in Japan have risen from 1.67% in mid-Jan to 2.22%, rising above those in the US that have been relatively stable at 1.90%, while they have fallen in the Eurozone 0.95 to 0.81% and in the UK from around 2.80 to 2.74%."
"Using these inflation expectations to generate real yield spreads suggests USD/JPY might now be trading at new long term cyclical highs."
"The most recent deficit may have been exaggerated by the Chinese New Year timing and the Japanese consumption tax hike in April-14. But the trends are hard to fault. Exports are struggling to pick up pointing the structural impediments in Japan slowing the country's capacity to capitalise on its currency competitiveness."
"This may reflect such factors as productivity gains in other Asian centres, which may still appear cheaper to set up production facilities, rigidities in the Japanese labour market and an aging demographic. Companies are yet to clearly ramp up business investment in Japan."
"This suggests that while Japan pursues the most aggressive monetary policy, JPY may continue to cheapen further."
Key Quotes
"Worries over possible risk aversion argue against a short JPY position. However, the rapid deterioration in the external balance and widening in the real interest rate differential in favour of USD/JPY suggests pressure should build for it to rise to new highs."
"5yr break even inflation expectations in Japan have risen from 1.67% in mid-Jan to 2.22%, rising above those in the US that have been relatively stable at 1.90%, while they have fallen in the Eurozone 0.95 to 0.81% and in the UK from around 2.80 to 2.74%."
"Using these inflation expectations to generate real yield spreads suggests USD/JPY might now be trading at new long term cyclical highs."
"The most recent deficit may have been exaggerated by the Chinese New Year timing and the Japanese consumption tax hike in April-14. But the trends are hard to fault. Exports are struggling to pick up pointing the structural impediments in Japan slowing the country's capacity to capitalise on its currency competitiveness."
"This may reflect such factors as productivity gains in other Asian centres, which may still appear cheaper to set up production facilities, rigidities in the Japanese labour market and an aging demographic. Companies are yet to clearly ramp up business investment in Japan."
"This suggests that while Japan pursues the most aggressive monetary policy, JPY may continue to cheapen further."