USDJPY looks lower on broad USD rout – #SaxoStrats
- The US dollar struggled against the major currencies in the dying days of 2017 as the market took a dim view on the currency despite the US tax reform bill that many thought originally might support the greenback on the potential boost to US growth and as corporations might invest more at home on the drastic chop to the headline rate.
- Instead, the US dollar has weakened sharply as the focus may be on the implications for US fiscal dynamics, as this tax reform bill promises to blow a large hole in the budget deficit – perhaps as much as 2% or more of GDP.
- If the current account/fiscal dynamics situation is the general focus, then the Japanese yen may have some catching up to do versus its peers in strengthening against the struggling US dollar. While the Bank of Japan is maintaining a very loose monetary policy, the yen enters the year as far-and-away the weakest major currency, and Japan runs a large current account surplus of some 4% of GDP that contrasts with the US's deteriorating current account outlook under the new tax regime and the Fed's quantitative tightening, which only weakens the fiscal outlook further for the US.
- As the market has shown increasing signs in recent months of ignoring shifts in interest rate spreads (which have been USDJPY benign and even supportive), current account fundamentals may be back as a major consideration, requiring a significant adjustment lower in USDJPY if so.
Management and risk description
We look for USDJPY to drop quickly through the 112.00 level as the trading year gets into full swing, maintaining a stop well above 113.00 until we see a daily close well below 112.00. For the 2-3 week target, we look to take profit ahead of the Ichimoku daily cloud, which comes in the low 109 's over the next couple of weeks.But we we may choose to take quick or partial profits if the drop is particularly sharp before we have a look at this Friday's US employment data.