USD/JPY to get back to 110 over summer – SocGen

Research Team at Societe Generale noted that in its latest report that it expects USD/JPY to swing higher to 110 levels over the summer, irrespective of uncertainty surrounding the Fed and BOJ policy decisions.

Key Quotes:

“This morning’s Japanese policy story is that Japan will announce a fiscal stimulus package of ‘more than Y28trn’ with Y13trn in new fiscal measures. The reaction to the news ranges from hope to massive scepticism that all we will get is a set of existing spending measures repackaged to look impressive.”

“The key is how much new bond issuance it leads to and speculation that Japan will start issuing 50year JGBs reflects the ‘hope’ side of the debate.”

“The more debt-financing there is for easier fiscal policy the better for growth and the more of that spending that is financed by the BOJ buying low-yielding long maturity debt, the better too.”

“The 10-30yr JGB curve slope has steepened sharply in the last few weeks and the chart shows a spurious correlation with USD/JPY. More fundamentally, the 10year real USD/Japan yield differential is back up to 75bp.”

“There’s more than enough uncertainty around about what policy measures will actually be taken but if we get a meaningful fiscal package, more BOJ bond-buying, and any kind of upbeat FOMC message, I think USD/JPY can get back to 110 over the summer.”