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18 Apr 2013
Forex Flash: USD/JPY to push to 110 - Societe Generale
Sebastien Galy, Senior FX Strategist at Societe Generale has taken a structural look at USD/JPY and sees potential for spot to push to 110.
He begins by highlighting the substitution effect, of low JGB curves forcing local investors into higher yielding assets at home and abroad. They see that official flows only offered one day, and the move has seen flows into the European core (France, Holland et al), while there are unconfirmed reports that the same happened later in the US. Overall he sees that it is good news for G10 governments in that it suggests easier funding conditions. However, he does see a negative side. Galy moves to highlight the concept of Substitution vs. the Wealth Effect, where USD/JPY is now a function of a better US economy and Global growth (Wealth Effect). He also sees Policy risk, and the critical issue is the ability of the BoJ to control inflation expectations as growth recovers. On this front he believes that home bias remains, creating pressure on the BoJ to control inflation expectations as growth returns, and not only real money, but banks are at risk, leaving them deeply interlocked with JGB´s. The final risk is the that while inflation is imported, consumer savings are decimated, leading to a UK style outcome.
He begins by highlighting the substitution effect, of low JGB curves forcing local investors into higher yielding assets at home and abroad. They see that official flows only offered one day, and the move has seen flows into the European core (France, Holland et al), while there are unconfirmed reports that the same happened later in the US. Overall he sees that it is good news for G10 governments in that it suggests easier funding conditions. However, he does see a negative side. Galy moves to highlight the concept of Substitution vs. the Wealth Effect, where USD/JPY is now a function of a better US economy and Global growth (Wealth Effect). He also sees Policy risk, and the critical issue is the ability of the BoJ to control inflation expectations as growth recovers. On this front he believes that home bias remains, creating pressure on the BoJ to control inflation expectations as growth returns, and not only real money, but banks are at risk, leaving them deeply interlocked with JGB´s. The final risk is the that while inflation is imported, consumer savings are decimated, leading to a UK style outcome.