MUFG Hold Bearish Bias on Japanese Yen into Year-end

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- Yen tipped to lose value into year-end

- MUFG maintain "bullish bias" on USD/JPY

- Risk to view is JPY strength on U.S.-China trade deal failure

Foreign exchange analysts at Mitsubishi UFJ Financial Group (MUFG) - a leading global financial services group and one of the largest banking institutions in Japan - have said they retain a bearish stance on the Japanese Yen into year-end.

"The combination of higher yields overseas and improving global risk sentiment is a negative combination for the Yen," says Derek Halpenny, Head of Research for Global Markets EMEA and International Securities at MUFG in London.

The call comes at the Pound-to-Yen exchange rate enters a distinct sideways orientated trading pattern, with the pair trading between 141.54 and 138.96 since mid-October. However, cast the eye back towards mid-August and we see the Pound has been trending higher against its Far Eastern counterpart.

The U.S. Dollar-to-Yen exchange rate is 108.66, as a gradual trend higher from lows towards 104.50 reached back in late-August extends.

"The yen continues to trade on the back foot in the near-term," says Halpenny. "The yen has been undermined by the ongoing improvement in global investor risk sentiment. The U.S. and China have made progress towards a partial trade deal which is expected to be finalised before the end of this year."

The eventual striking of a trade deal between the U.S. and China appears to remain a base case scenario for markets, and MUFG is of the opinion that market attention will fixate on the details of the eventual deal.

"If it involves a larger roll back of tariffs it would increase downside risks for the yen," says Halpenny.

"The improvement in global invest risk sentiment has not yet been undermined by the modest adjustment higher in yields. The 10-year UST yield temporarily rose back towards 2.00% as concerns over a sharper US slowdown have eased, and the Fed has signalled a pause to the rate cut cycle. The combination of higher yields overseas and improving global risk sentiment is a negative combination for the yen," says Halpenny.

MUFG is forecasting the USD/JPY to trade in a range of 106.00 to 111.00, and maintain a bullish bias.

However, clients of MUFG are warned in the firm's latest cross-asset monthly research report that a risk factor to these expectations would be a failure of the U.S. and China to reach a trade deal, something that would provide a shock to investors and trigger a flight to 'quality'.

The Yen is tipped to benefit under such a scenario.

"USD/JPY could quickly fall back towards the summer lows at 15 20 November 2019 around 106.00. The US dollar would strengthen more broadly against Asian and emerging market currencies," says Halpenny.

Last week the White House was claiming that a trade deal with China was down to "short strokes", but global markets were seen trading lower in mid-week trade amidst signs that U.S. and Chinese negotiators continue to struggle to find a solution.

The U.S. Congress on Tuesday passed the Hong Kong Human Rights and Democracy Act of 2019, aimed at offering support to Hong Kong which is currently resisting the growing imposition of Chinese rule. The move by Congress has however spurred market concerns that China will respond by pushing back against U.S. efforts to strike a deal.

"Negotiators are still trying to tap the ball in and indeed may be further from success. Reports of no deal before year end seem plausible, with Congress's Hong Kong bill adding to the degree of difficulty. This seems likely to keep capping the likes of the Australian Dollar, Treasury yields and USD/JPY," says Sean Callow, a foreign exchange strategist with Westpac, the Australia-based global investment bank.

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