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USD to JPY forecast for 2020

By Elena Berton

Will the 'safe haven' Japanese yen weaken versus the dollar as the global economy stabilises and the US election gets under way? We look at USD/JPY forecast for 2020

During times of uncertainty, whether conflict in the Middle East, natural disasters or the threat of pandemics, investors tend to switch to the Japanese yen.

The Japanese currency is considered one of the world’s “safe havens” along with the Swiss franc.

The yen became investors’ go-to haven during the 2008 financial crisis and its aftermath, when the Japanese currency appreciated by more than 20 per cent.

More recently, uncertainty over the 2013 Italian elections caused the yen to rise over 5 per cent against the euro and 4 per cent against the dollar in one day.

Safe haven

Why is the yen considered a safe currency?

Japan is the world’s third-largest economy and one of the largest exporters in dollar terms.

It exports significantly more goods and services than it imports, bringing decades of current account surpluses that have positioned Japan as a net creditor to the world.

Japan has also been a trailblazer in terms of low-interest rates, which have lingered at rock-bottom levels for nearly 20 years as the Bank of Japan attempted to stave off deflation and spur economic growth after its “lost decade” – the prolonged slump after the 1980s economic bubble burst.

From 1993 to 1998, the interest rate on credit dropped from 6 per cent to zero. Rates are currently set at minus 0.1 per cent, but the country’s central bank has hinted that it is willing to cut further into negative territory as part of a fresh effort to reach its 2 per cent inflation target.

USD/JPY in 2019

Last year a volatile forex market kept seeking safe-haven assets amid the US-China trade war, Brexit uncertainty and concerns over the global economic slowdown.

USD/JPY declined to as low as 105 in mid-August, resulting in a loss of around 4 per cent in the first eight months of the year.

This trend reversed in the last quarter of 2019, driven by positive US-China trade negotiations that culminated in the phase-one deal between the two countries, the Conservatives’ landslide victory in UK elections and the Federal Reserve bank’s pause in rate cutting.

The USD/JPY rate settled at 108.660 at the end of the year, down 0.943, or 0.86 per cent.

Improved market sentiment carried on into 2020, excluding the temporary reaction to the US drone attack in Iran in early January, when the yen hit a two-month high of 107.92 against the US dollar.

As China struggles to contain the flu-like coronavirus that has infected hundreds of people in the city of Wuhan and has spread to other countries, the yen has rallied to 109.57, its highest since January 13.

Shrinking Japanese economy

However, turning to the USD/JPY forecast for 2020, most analysts agree the yen will weaken against the dollar by the end of the year.

The US economy is expected to pick up, with the Federal Reserve increasing interest rates, which would support the USD and reduce safe-haven buying for lower risk currencies like the yen and Swiss franc.

Many economists expect the world’s third largest economy to have shrunk in the final quarter of last year as the US-China trade war hit exports and the October 1 sales tax hike weighed on private consumption.

Despite recent signs of green shoots in global manufacturing, Japanese exports dropped more than expected in December for the 13th consecutive month.

The value of shipments overseas fell 6.3 per cent from a year earlier, weighed down by sliding exports of cars and auto parts.

Chance of further rate cuts

If the Japanese economy falters during 2020, the chance may increase of further interest rate cuts from the Bank of Japan.

The central bank has maintained that current low levels of interest rates are likely to stay unchanged "at least through spring 2020".

But at its October meeting, the central bank indicated that short and long-term interest rates are expected to remain at their present lower levels for "as long as necessary," removing the spring 2020 timeline.

Freya Beamish, chief Asia economist at Pantheon Macroeconomics says: "The new guidance leaves the door open to the rate cut expected by markets at the December meeting, though [governor Haruhiko] Kuroda mentioned in the press conference that the Bank didn’t discuss any specific easing measures at the meeting."

A weakening JPY in 2020

Among investment banks’ USD/JPY predictions for 2020, Mizuho Bank and Morgan Stanley have the most bearish outlook for the yen.

Mizuho sees the currency pair ending the first quarter at 107, gradually declining to 100 by the end of the year, while the US bank has forecast a level of 100.74.

At the opposite end of the USD/JPY forecast range, ABN Amro expects 108 in the first quarter, rising to 112 at the end of the fourth quarter.

Citibank’s USD/JPY forex forecast expects the Bank of Japan to maintain its policy status quo unless the USD/JPY rate falls below 100.

Its analysts say: “It seems unlikely that the BoJ will be leading the charge in a dovish direction by G10 Central Banks. Rather, any further BoJ ease will be reactive to ECB/ Fed easing and therefore likely following JPY strength, not prompting relative weakness.”

Geopolitical tensions

HSBC’s USD/JPY exchange rate forecast falls in the middle of analysts’ ranges, down to 105 at the end of the last quarter in 2020.

HSBC analysts wrote in a note to clients: “The domestic story for Japan remains downbeat, with a notable decline in activity data relative to consensus expectations. Nonetheless, the JPY remains mostly driven by global developments, notably expectations around the US-China trade agreement and geopolitical tensions.”

However, they note that should geopolitical tensions return, the JPY is likely to continue appreciating against the USD.

Gareth Berry, forex and rates strategist at Macquarie, reckons the risk of a rate cut has not gone away but notes the BoJ will remain hesitant.

“We are neutral for the next few months. If you look at what drives USD/JPY, it is the policy stance of the two big central banks, the FED and the BOJ. And neither central bank seems to be in any hurry to adjust policy settings or even their policy stance,” he told CNBC.

In the meantime, investors will keep an eye on economic indicators for both the US and Japan for signs of any pick-up in activity at least until March, when the Fed is likely to indicate whether it will cut interest rates.

US election weighing on USD/JPY

The next milestone to gauge the USD/JPY long-term forecast will be the run-up to and the outcome of the US presidential election in November.

The USD/JPY rate is likely to continue to be underpinned if Donald Trump remains the frontrunner, according to analysts. But if the Democrats choose a strong candidate the USD/JPY forex forecast will probably weaken as most investors view the Democratic party as less business-friendly.

“If we fast forward towards the end of this year, when we start to approach the US presidential election, that’s when it gets interesting because we expect a degree of USD weakness and USD/JPY will be investors’ preferred vehicle to express a view on that election. We saw that play out in 2016 when USD/JPY fell from 120 down to about 100 as that election approached,” Gareth Berry adds.

FURTHER READING: GBP to USD prediction 2020: is the pound going to rally?

FURTHER READING: Euro-dollar forecast for 2020

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