2016 Dollar to Yen Forecasts Cut at Barclays, But Near-Term USD/JPY Move Lower Exhausted

The Bank of Japan looks increasingly toothless when confronted by demand for the yen argue analysts with Barclays announcing they are taking the knife to their 2016 forecasts.

Over the last two weeks the Dollar has fallen by 6.44% against the yen and this decline has taken it straight through the bottom of a trading range.

The range has been in place since the autumn of 2014, “and, unsurprisingly, this corresponds pretty neatly with a period of major weakness in Tokyo equities,” points out Bill McNamara at brokerage Charles Stanley.

The declines come despite the Bank of Japan introducing negative interest rates. The failure to stoke Yen weakness and stimulate lending using negative interest rates has woken markets up to the fact that central banks simply lack firepower.

The hope at the BoJ was negative interest rates would persuade banks to lend more to the private sector, increasing demand for goods and services and hence stimulate the sluggish Japanese economy, but is this likely to happen on any meaningful scale?

"Judging by recent stock market rises so far it seems as if the banks are shifting into buying equities rather than lending to their customers. If the negative interest rate policy is to work businesses and households must also want to take up the extra credit to carry out new spending plans.

"The problem is that recent evidence suggests neither have the confidence or appetite to borrow and spend. Unless this changes in 2016, when GDP growth in the global economy seems likely to slow down, there will be little change to the gloomy story of the last quarter for Japan,” says Professor Ben Knight at Warwick Business School.

McNamara says news that the Japanese economy slipped back into recession in Q4 will probably rekindle hopes that the BoJ will step up its QE program and that could lead to a short-term rebound for the dollar; however, the bigger picture is that we probably have not seen the end of this yen strength.

Barclays Downgrade Forecasts for USD to JPY

Barclays have announced they are taking the knife to their original dollar / yen exchange rate forecasts in light of recent developments.

Deterioration in global risk sentiment drove USDJPY sharply lower last week to temporarily below 111 despite the BoJ adoption of negative interest rates policy (NIRP) and some official jawboning.

“Given fear of broader global risk outweighing worries about further BoJ policy easing, concerns on limits of policy arsenal at the BoJ (and other central banks), and delay in Fed hike expectations, USDJPY appears prone to further downside risk without clear catalyst for an improvement in global market sentiment,” say Barclays in a briefing to clients.

Barclays now forecast USDJPY at 100 through Q1-Q3 and 95 by year-end.

“According to our technical research, the break of 115 last week confirmed the downtrend for USDJPY and the next immediate target is 110, followed by 105 (see A yen for the JPY, 8 February 2016),” says a note on the matter.

Those with an interest in the dollar to yen exchange rate should be aware that while there is further downside risk in USDJPY ahead, the pair remains highly prone to fluctuations in global risk sentiment and speculations about further BoJ easing or FX intervention may also add two-way volatility in the near term.

“Yet, short-lived impact of the surprise NIRP decision on the JPY raises questions on the efficacy of further easing to stem appreciation pressures and global risk dynamics will likely prevail as main driver of the JPY,” say Barclays.

USD/JPY Decline Exhausted Near-Term

While Barclays have axed their forecasts for the dollar / yen exchange rate in the longer-term we hear from analysts at Bank of America that the move lower in the pair could be exhausted for now.

Rationale for the call is based on four observations:

1) The deep intraday dip seen yesterday to lows of 110.985 followed by the subsequent recovery into the NY close may be a sign that JPY short positions could be fundamentally reduced amidst extreme levels of fear.

2)    Technically – The recent JPY rally has increasingly involved speculative trading in our view suggesting that technical analysis is critical in assessing near term risks.  Paul Ciana, Chief FX Technician has closed his USDJPY short conviction following it reaching 111.90 where he expects the pair to technically consolidate.

3)    Quant Models – Quant model shows a risk of the trend reversing among high beta cross-yen pairs.  The major exception to this is EURJPY as models indicate that downside trend will persist for this funding currency pair

4)    Policy Timing – as risk-return has diminished in the short-term JPY’s reaction to events will be more symmetric and prone to policy response and authorities comments.