TD FX Strategy Research discusses USD/JPY outlook in 2018 and argues that one of the underappreciated currencies for next year is the JPY.

"Indeed, next year’s consensus of forecasters puts USDJPY at 115 against our forecast of 104. Many observers continue to focus on rate differentials (and levels) rather than the prospects of another regime shift that kick-started the move in the EUR this year.

Our longer-term valuation models argue that the JPY remains one of the cheapest currencies in the G10 while a huge balance of payments deficit underscore the massive stock of outsourced capital. The BoJ is likely to undergo extreme tapering next year against a backdrop of GDP running nearly 2.5x times its potential. This setup could usher in a new regime change, leaving JPY well-placed in G10," TD argues.

In line with this view, TD Research maintains a short USD/JPY position* from 111.85 targeting 107, with a stop at 114.80.

Source: TD Securities ResearchOriginal Article