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Nomura discusses the dynamics influencing USD/JPY, focusing on recent remarks by BOJ Deputy Governor Uchida which did not significantly shift expectations for a March NIRP (Negative Interest Rate Policy) removal. Despite a bullish trend for USD/JPY, bolstered by strong US economic data, Nomura expects the Ministry of Finance (MOF) to engage in verbal interventions to curb JPY depreciation and does not rule out an earlier than anticipated NIRP removal by the BOJ in March. The market's current stance on a potential May Fed rate cut offers limited upside for US yields and the USD. Additionally, a slowdown in Japanese retail investors' foreign equity purchases through mutual funds in February could further tilt the risk-reward balance towards short positions in USD/JPY.
Key Insights:
- BOJ Policy and Market Expectations: Uchida's optimism about the economy and wage talks hints at a likely NIRP removal by April, but the market remains cautious, keeping USD/JPY strong.
- Verbal Intervention and Policy Timing: With potential verbal interventions and the possibility of an earlier BOJ policy adjustment, there may be pressure against further JPY weakening.
- Fed Rate Cut Expectations: The anticipated May Fed rate cut is largely priced in, suggesting constrained growth prospects for US yields and the USD.
- Investment Patterns: A noted decrease in Japanese retail investors' enthusiasm for foreign equities in February compared to January's record pace suggests a shifting momentum that could impact USD/JPY.
Conclusion: Nomura maintains a bearish stance on USD/JPY, advocating for short positions given the current market dynamics, policy expectations, and investment trends. The combination of potential policy shifts by the BOJ, expected verbal interventions, and the limited upside from Fed rate cut anticipations presents a scenario where the risk-reward is skewed towards betting against the USD/JPY.
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We're almost back at the 2023 highs for USD/JPY:
