Morgan Stanley: Pound to Yen Forecast to Rise to 144.00 as Brexit Fears Ease

Trading the dragon (GBP/JPY) higher is the advice of analysts at Morgan Stanley a unique conjunction of factors sees upside pressure increase.

The post-Trump FX reset is likely to favour the British Pound versus the Japanese Yen, says Morgan Stanley’s head of research Hans Redekker.

Redekker and his team see the pair rising to an upside target at 144.00, with a stoploss limiting risk at 124.70, the current exchange rate is 134.50.

“No new negative news from the Brexit negotiations have allowed GBP to rebound,” remarks Redekker et al, adding:

“On the JPY side it is higher inflation expectations, steeper yield curves and Japanese investors moving money abroad adding to JPY weakness.”

Brexit concerns have eased considerably following comments from Michael Barnier, a Brexit negotiator, that the EU, “will not be aggressive.”

This has aided the Pound, which has already been supported by hopes of a free trade deal with the US due to Trump’s pre-election pledge that he would put the UK to the front of the queue when it came to trade negotiations.

The Japanese side of the trade, meanwhile, is expected to weaken as investors move money out of Japan, in search of higher yields in the US and abroad.

This is because, in contrast to other countries, the Bank of Japan is expected to keep short-term interest rates and yields low.

This will probably contrast with the US and the UK where higher rates are more likely.

In the modern world of open borders and unfettered capital flows, it’s the countries with higher yields whose currencies strengthen, assuming their economies are stable.

Morgan Stanley see risks the trade may fail, however, particularly if the UK’s negotiation stance hardens.

“On the JPY side it is higher inflation expectations, steeper yield curves and Japanese investors moving money abroad adding to JPY weakness,” said Morgan Stanley.

They see risks to the trade as coming from a hardening rhetoric from the UK government over Brexit, perhaps from prioritising immigration over economics.