We expect the Bank of Japan to cut its policy rate by 20bp to -0.3% on 28 April and to step up its purchases of ETFs and J-REITs. This is not priced in the market.
In the short term, we think the strong downtrend in USD/JPY is likely to persist - at least until disrupted by policy action. If USD/JPY continues to fall further in the coming weeks, the risk is that the BoJ might act before its monetary policy meeting on 28 April.
Stretched short-term FX drivers such as positioning and technical indicators imply BoJ easing might be able to counter the strong downward pressure on USD/JPY stemming from fundamentals. We look for a stabilisation of USD/JPY above 110 targeting the cross at 112 in 1-3M.
We remain bearish on the JPY on a six- to 12-month horizon versus both the USD and EUR due to a combination of cyclical and monetary policy divergence and we recommend positioning for a weaker JPY ahead of 28 April. We think buying 3-6M EUR/JPY risk reversals offer an attractive risk/reward for EUR- and DKK-based pension funds/corporates hedging JPY assets/income, while we recommend investors with an alpha mandate go long USD/JPY spot or via 3M risk reversals.
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