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According to analysts from Danske Bank, if the negative sentiment returns to markets, the yen could see renewed support but over the medium term, they see EUR/JPY to recover gradually on the back of the divergence between the European Central Bank and the Bank of Japan.
Key Quotes:
“The BoJ continues to emphasise its willingness to keep monetary policy accommodative and we expect no changes before the end of 2019 at the earliest. However, its actions are starting to look contradictory as, in our view, slowing monetary growth will not bring the BoJ closer to its inflation aim. Furthermore, it could start to become JPY positive. Growth in JPY excess liquidity slowed down in 2018 and with the BoJ on hold, it is unlikely to pick up again in the short term.”
“The latest release in IMM (mid-December) showed that investors were stretched short JPY before the end-of–year surge in JPY. If negative sentiment returns, JPY could see renewed support. If the oil price were to overshoot, it would be negative for the JPY.”
“Over the medium term, we expect EUR/JPY to recover gradually supported by ECB-BoJ divergence as an ECB hike rate hike draws closer and we see continued portfolio outflows out of Japan. We target EUR/JPY at 132 in 6M and 140 in 12M.”