USD/JPY: Expect BoJ to cut by 20bp in April – Danske Bank

By FXStreet Research Team at Danske Bank, notes that the Japanese GDP contracted 0.3% q/q in Q4 15, and they see a high risk of a technical recession in Q4-Q1 with yet another negative growth rate in Q1.

Key Quotes

“Inflation printed at 0.0% y/y in January and is likely to remain subdued due to the combination of a falling oil price and appreciation of the yen, which has appreciated more than 6% in trade-weighted NEER terms year-to-date.

Monetary policy. Given the weak inflation and growth outlook, we maintain the view that more monetary easing is warranted and we have moved forward our call on the BoJ from July to April. We expect it to cut its key policy rate by 20bp to -0.3% on 28 April while keeping its QE programme unchanged at JPY80trn per month.

Flows. Japan’s trade balance improved substantially in 2015 to a current account surplus of 3.3% of GDP, providing increasing support to JPY.

Valuation. USD/JPY is significantly overvalued. PPP is around 82, while our MEVA model suggests 104 is ‘fundamentally’ justified.

Risk. USD/JPY remains highly correlated with investors’ risk appetite. Investors are speculatively long JPY – the most stretched long positioning since 2011, suggesting that the cross probably is less …read more

Source:: FX Street