EUR/JPY: Rabobank targeting 108.00 by the end of the year

In a note published on Thursday, Rabobank believes that the EUR/JPY pair should reach 108.00 by the end of the year:

The bank highlights "the context of slower growth in the euro zone, a more docile ECB and a general decline in risk appetite that traditionally benefits the yen, a safe haven.

Measured from the end of September, the euro lost around 8% against the yen. In fact, during this period, the yen was the most successful currency of the G10. The yen's gains suggest that risk appetite has fallen over the past 7 months, in line with growing concerns about global growth.

While the yen is the best performing currency of the G10 since the beginning of October, the dollar has almost kept pace, losing only 2% against the yen during this period.

It is likely that interest rate spreads play a role in the orientation of flows towards the dollar and thus limit the potential for a decline of the USD/JPY.

Various purchasing power parity models suggest that the yen is undervalued against many G10 currencies. This conclusion can also be drawn from the BoJ's measurement of Japan's exchange rate. The index is currently just above its 2015 level, but it was the lowest since the late 1960s. If the dollar continues to divert flows from the yen, it will be useful to BoJ policy makers in their efforts to support inflationary potential.

Due to interest rate spreads, we expect the greenback to continue to divert flows from the yen to safe haven currencies.

We therefore have a year-end EUR/JPY forecast at 108.00, although we currently see a downside risk in this perspective. Our 6-month forecast for the EUR/JPY is 118.8."