FxWirePro: Dollar/yen likely to extend drop towards 97 area in the near term

The yen is likely to remain strong despite a higher possibility of an interest rate hike from the U.S. Federal Reserve by the end of the year. San Francisco Fed President John Williams indicated last night that a rate hike by the end of this year is a real possibility as the labor market is strong and inflation edges upward. However, even if the Fed goes for a hike, the current path is not sustainable to keep the dollar strong. The Fed has been cutting its long-term interest forecast since 2015 and it is likely to continue on that path in September meeting too. In addition to that, the doves in FOMC outnumber the hawks.

On the other hand, the yen is one of the top performing currency worldwide and the best performer among G10 counterparts in 2016. The yen’s biggest appeal remains as a risk aversion counter in 2016 and the fact that the Bank of Japan (BoJ) is standing at it wits end in its fight against the deflation.

Our long term call, to buy the yen against the dollar at 118, targeting 98 has already reached its target, and we have extended the target towards 90. However, we think it could take some time before 90 gets reached.

In the short term, in the current run, we expect the yen to reach towards 97 per dollar area.