RBC Sees Upside USD/JPY Risks, Which IS Against The Consensus

RBC Outlines the rationale for its bullish USD/JPY view: "Of 41 up-to-date forecasts in Bloomberg’s survey for USD/JPY, 40 have an end- year forecast below spot and the vast majority of these have a forecast which is also below the forward rate (129). Risk in FX markets is rarely as asymmetric as this implies. RBC is the one forecaster that has end-year above spot (140), though the gains we expect are modest – more like an extension of the uptrend this year than a resumption of the 2023 surge. "

"As far as we can tell USD/JPY bearishness is driven by a combination of the widespread negative view on USD generally and the specific impact of the BoJ’s widely- anticipated exit from YCC. We don’t disagree with the view that the end of YCC is coming (though we expect no change from BoJ this week). Where we differ from the consensus view is in its relative importance, compared to the other paradigm shift JPY-based investors are adapting to – the move away from zero rates in the rest of the DM world – and what this has done to the cost of hedging.

"The Lifers’ investment plans for this fiscal year – released over the last few days – show ongoing plans to reduce holdings of hedged foreign bonds . While this is happening, we think it highly likely they are also cutting hedge ratios on bonds they are retaining, leaving domestic investors USD/JPY buyers. In the longer- term, this will drive USD/JPY higher, though we don’t rule out shorter- term bouts of selling from outside Japan, particularly around BoJ policy announcements. A deep US and global recession would upend our forecasts, but is not in our central forecast."