CBA sees USD-JPY trading below 100 before the end of September

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If you think the Bank of Japan will add to existing monetary policy stimulus at its September 21 meeting, be prepared for disappointment. Although it’ll be a close call, it’s unlikely to do so, and that’ll put a rocket under the Japanese yen.

That’s the view of Joseph Capurso, senior currency strategist at the Commonwealth Bank, who believes that the BOJ will likely forego additional easing on this occasion, dashing hopes for another monetary sugar hit that have been building steadily since the bank met in late July.

He explains:

USD/JPY has been supported by a view among market participants that the Bank of Japan (BOJ) staff review of BOJ Board policy, to be discussed at the Board’s 21 September meeting, will lead to more BOJ policy easing. The risk is the BOJ Board asks for more analytical work to be done, rather than deliver more easing on 21 September. Japanese newspaper Sankei is reporting the BOJ is “struggling to form unified opinion on policy review”. Since Kuroda became governor in 2013, the BOJ has eased monetary policy only at monetary policy meetings where it has updated its economic forecasts. The BOJ’s next forecast update is on 1 November.

Should that scenario eventuate, Capurso believes that the USD/JPY will fall below 100 by late September, a level that the pair traded below on several occasions in August.

He suggests the risk to this view is if the US Federal Reserve increases interest rates around twelve hours after the BOJ announcement on 21 September, although acknowledges that “this is not our view but a risk to our view”.

The USD/JPY currently trades at 101.55.

USD/JPY Daily Chart

Though he believes the USD/JPY will trade below 100 by the end of September, Capurso doesn’t expect it to remain there long, citing three specific factors that will see it push higher into year end: a narrowing in Japan’s current account surplus, additional monetary policy easing from the BOJ in November and a rate hike from the US Fed in December.

“Our long held view is Japan’s current account is the major driver of USD/JPY,” he says.

“Japan’s current account surplus started to shrink from 4.1% of GDP in April to 3.7% of GDP in June. While tentative, a recovery in commodity prices appears to have started and will further eat into Japan’s trade and current account surplus, and guide USD/JPY gradually higher.

“Our end of year forecast for USD/JPY of 106.0, is based on a FOMC hike in December and more BOJ easing in November.”

On the latter, Capurso believes that the greatest uncertainty is not whether the BOJ will ease, but what form it will take.

“Easing options have their own drawbacks. QE risks reducing liquidity in the bond market and deeper negative interest rates risks reducing the profits of Japanese financials.”