EUR/JPY: Political uncertainty likely to curb the upside in the coming month - Danske Bank

According to analysts from Danske Bank, political uncertainty is likely to curb EUR/JPY upside in the coming month but they still see a case for a higher euro over the medium term horizon.

Key Quotes: 

“In our main scenario, we expect the BoJ to keep its policy unchanged, namely to maintain the short-term policy interest rate at -0.1% and the 10Y Japanese government bond (JGB) yield at 0% throughout our 12M forecast horizon, assuming that BoJ governor Haruhiko Kuroda is reappointed when his term ends in April.”

“The fate of the Abe administration is likely to be linked to the current accommodative policy
regime (Abenomics), and a change in leadership could increase uncertainty about whether Haruhiko Kuroda will be re-appointed. Hence, PM Abe’s survival is important for JPY in the medium term.”

“While the combination of strong global PMIs and postponement of US debt limit risk is good for risk appetite and has improved the prospect of a weaker JPY in the near term, domestic political uncertainty and geopolitical uncertainty related to North Korea represent a substantial downside risk to EUR/JPY.”

“Political uncertainty is likely to curb EUR/JPY upside in the coming month. Longer term, we still see a case for a higher EUR/JPY over the medium term horizon, driven by ECB-BoJ divergence, higher global yields (eventually) supported by global growth recovery and portfolio outflow out of Japan. We target EUR/JPY at 132 in 1M, 136 in 3M, 142 in 6M and 145 in 12M.”