SHORT USDJPY
CMP 156.3; TP 140 & SL 161.85
We believe BOJ is set for a 25-bps hike in it’s 24th Jan meeting unless the global financial markets experience mayhem in the first few days of the Trump administration. The two main differences from the December meeting are that the BoJ now has a functional channel of communication with the Ishiba administration and the market pricing for further Fed easing has collapsed. BoJ may speed up the pace if the incoming Trump team, especially Scott Bessent, demands a faster pace of policy normalization. It is our belief that Bessent thinks 1) the Yen is too cheap and 2) the BoJ is too slow in its normalization efforts. Another rate hike will most likely be in the Fall after the Upper House elections in July. Our estimate of the BoJ’s terminal rate is about 1.5-1.75%, meaning that the BoJ will continue its policy normalization in CY26. Also, if Bessent presents Tokyo a choice between higher tariffs against Japan and a stronger Yen achieved by a faster pace of policy normalization by the BoJ, the Ishiba administration will most likely choose the latter. So not only from interest rate differential perspective but also from geopolitics perspective with Trump admittedly in favour of a weaker dollar, JPY looks too cheap to us. With current narrative in US being “higher for longer” at its extreme as seen by only 40 bps of cut being priced in US, there is sufficient buffer for this trade to go right. If at all there is a financial accident in US due to high real rates or because of Trump’s volatile policies, JPY stature of being safe haven also gives strength to our trade idea. Keeping above facts in view, we have a high conviction call on USDJPY moving towards 140 with a stop loss around LTH of 161.85 in July’24.
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