EUR/JPY: Likely to move higher near to medium term -  Danske

According to analysts from Danske Bank, EUR/JPY  is likely to rise in the next one to three months on fiscal and monetary policy action from Japan.

Key Quotes:

“In our main scenario, we expect the Japanese government to announce a fiscal stimulus package including a delay of the planned VAT hike. We expect an announcement of fiscal stimulus to be JPY negative due to an expected improvement of risk sentiment among Japanese investors supporting the case for foreign portfolio investments. The correlation between Japanese equity and EUR/JPY has returned to positive territory as the euro’s status as a safe haven has faded. This implies that EUR/JPY is likely to move higher along with an increase in Japanese equities.”

“In addition, we expect the BoJ to cut its key policy interest rate by 20bp to -0.3% in connection with its monetary policy meeting ending on 29 July, which is the first meeting following the Upper House elections. We also expect the BoJ to announce new qualitative measures such as a maturity extension of its JGB purchases and a scale-up of its ETF and J-REIT purchases. A move at the next monetary meeting on 16 June is also a possibility, especially if a fiscal stimulus package has been announced around this time.”

“We forecast EUR/JPY will increase to 128.80 in three months. Given that speculative positioning is currently stretched long JPY, according to IMM, we think that risks are skewed to the upside relative to our forecast.”

“Finally, we still expect the core of the BoJ’s monetary policy regime to remain centred on the negative interest rate policy (NIRP) and qualitative easing. In contrast, the ECB effectively abandoned the currency war in March, shifting its focus on credit growth instead of pursuing further weakening of the euro through negative interest rates. Hence, besides declining support for the yen from a flow point of view, different monetary policy strategies imply EUR/JPY upside potential over the medium term horizon. We forecast EUR/JPY at 132.24 in 6M and 136.88 in 12M.”