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V.S.: The Japanese Yen appears to be the weakest G-10 currency this year. If we look at the shorter term, for example, the past month, it weakened substantially as well. Obviously, Japan's currency has been a significant underperformer in 2013.
V.M.: The Yen has been among the key underperformers this year, and we expect that trend to continue into next year. The key driver of more yen weakness remains the BoJ's aggressive monetary easing. Yen is our strong conviction sell recommendation for coming months.
What political and economic factors, to your mind, will have the most significant impact on the Yen until the end of year and in the first quarter of 2014?
V.S.: In our opinion, some of the main drivers for the year 2014 are going to be the U.S. economic growth and U.S. monetary policy. Thus, we expect QE tapering to start as soon as March 2014, which will put upside pressure on U.S. Treasury yields, and that will also push north the USD/JPY currency pair.
V.M.: One catalysts would be a potential decision by the Fed to taper as soon as December or January, which could add to the cyclical tailwinds for USD/JPY. Such a decision would highlight the growing policy divergence between the Fed, turning increasingly hawkish, and the BoJ, which is still very dovish. In addition, there are political and monetary policy factors like the Japanese sales tax hikes expected to be introduce next April. We think that the measure might be followed by another round of monetary easing in Q2 of 2014. More QE from the BoJ could encourage more JPY selling in coming months.
What are your short term and long term forecasts for USD/JPY?
V.S.: By the end of 2014 we expect the U.S. Dollar to reach the 118 level versus the Japanese Yen. Beyond that we predict that USD/JPY will climb toward 120 by the end of 2015.
V.M.: In the case of the USD/JPY, renewed tests of this year's high above 103 cannot be excluded, following the very strong payroll data out of the U.S. Beyond that, we suspect that 105 could be an interesting target for the upcoming months, and 108 is a good target for midyear 2014. The outperformance of the pair will be a mixture of two factors. First, we expect more dollar buying on back of Fed QE taper and exit. Second, more yen-selling could be on the cards in anticipation of another round of monetary stimulus by the BOJ next year.