Forex Flash: USD/JPY a solid buy over next weeks to 85.00 – UBS

FXstreet.com (Barcelona) - According to Gareth Berry, a Research Analyst at UBS, "We like the USDJPY higher over the coming months and stick to our 3m target of 85.00. However, we are wary of buying the pair aggressively at current levels based purely on the 'Abe effect' for reasons such as pre-election jawboning, hopes that the BoJ would greet the new administration with a dovish surprise at their Dec 20th policy meeting could be disappointed, and finally global risk appetite is under threat as year-end approaches."

That last point is of particular relevance today as we await news of durable goods orders from the US. Policy uncertainty surrounding the fiscal cliff encourages firms to put off making longer-term investment plans until visibility improves. "Such weakness could spread to other US data releases too, allowing the yen to assert its safe haven credentials over the coming weeks." Berry warns.

We should not lose sight of the US yield curve either given the yen's sensitivity to the 2y point in particular. The launch of Operation Twist in September 2011 was a key factor in propping up the USDJPY as the Fed's decision to sell its short-dated UST holdings boosted front-end yields. However, Twist will be retired in a few weeks removing this source of support. "What's more, our US economists expect the Fed to more than double its monthly pace of asset purchases at the Dec 12th FOMC meeting - something most FX investors have overlooked given the focus on Japanese politics of late." Berry adds.