Bank of America Merrill Lynch discusses USD/JPY outlook and notes that USD/JPY has remained relatively resilient as of late despite NKY weakness .
"While the Nikkei 225 index has corrected more than 5% since President Trump officially approved tariffs on Chinese goods on 14 June, USD/JPY has been largely unchanged. This divergence may continue if trade tensions rise only gradually, until the market starts pricing in slower US growth and/or Fed hiking path. This may take a while judging from the run of strong US data," BofAML notes.
"USD/JPY's recent resilience has both macro and flow aspects, in our view: (1) USD/JPY's diminished sensitivity to risk assets and sustained sensitivity to the Fed's policy; (2) M&Aactivity by Japanese corporates; (3) net equity flows pointing to yen selling; and (4) lack of short JPY positions among foreign fast money," BofAML argues.
In line with this view, BofAML expects USD/JPY to rise to 116 by 3Q18 before peaking but acknowledging that unpredictable trade war scenarios will likely drive the currency into the summer. BofAML expects USD/JPY to end year at 112.