House Oversight — Estate records
HOUSE_OVERSIGHT_014424
Japan Macro Watch
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Japan Macro Watch USD/JPY: Buy-on-dip cycle to continue; 115- 120 by end-2017 14 November 2016 Buy-on-dip cycle continues While we had acknowledged the risk of the “final JPY strength” this autumn on the BoJ's limit and US elections, it has been our view that the USD/JPY’s dips was to be bought as the 100-105 level was where medium-term directional risk was likely to reverse to the upside (Dollar’s 100 Yen risk 02 March 2016). In our view, a Republican sweep would first lead to JPY strength on risk aversion, but eventually be the most bullish outcome for the USD/JPY. The price action last week – a shallow dip – tells us two things about the USD/JPY. First, the view that a GOP sweep would boost the USD/JPY was probably more widely shared than we had thought, so a dip failed to stretch. Second, there may be more potential USD/JPY buyers than sellers, which is in stark contrast to last year, when there were many more potential USD/JPY sellers than buyers (Case for a stronger yen in 2016 18 December 2015). The “buy-on-dip” cycle in USD/JPY is likely to continue as we expect the pair to reach 115-120 by end-2017. We remain constructive about Japanese equities and see banks, insurance continue outperforming REITs near-term. Investment Strategy Japan Shusuke Yamada, CFA >> FX/Equity Strategist Merrill Lynch (Japan) +81 3 6225 8515 shusuke.yamada@baml.com Paul Ciana, CMT Technical Strategist MLPF&S +1 646 855 6007 paul.ciana@baml.com Higher US rates (esp. if steepening) to boost USD/JPY USD/JPY performs best at the time of UST bear-steepening as better risk sentiment reduces the JPY’s safe haven demand and a wider yield spread increases the USD demand from Japanese investors (Exhibit 2). For our US strategists, the clean sweep means fiscal easing and higher rates, supporting their higher real rate view (A win for bond bears and USD bulls 09 November 2016). The USD/JPY has recently tracked real yield spread closely (Chart 1), and the pair is gradually producing higher carry […]