Despite last week’s official intervention, the Japanese yen struggles to sustain gains against the U.S. dollar, prompting UBS to anticipate a potential medium-term decline in the USD/JPY pair.
As of 10:30 ET (14:30 GMT), USD/JPY traded 0.1% higher at ¥155.64, slightly below the ¥160 level witnessed last week, representing the yen’s weakest level against the dollar in 34 years.
This persistent weakness comes despite Japanese authorities reportedly spending approximately $60 billion last week to bolster their currency. Additionally, the Bank of Japan issued its strongest warning yet on Wednesday, with Governor Kazuo Ueda suggesting that monetary policy action may be necessary if yen depreciation significantly affects prices.
UBS conducted an analysis of the period from 2006 to 2007, when the yen faced similar pressures amid high U.S. yields and widespread carry-trading. During this time, U.S. yields reached enticing levels (>5%) compared to low Japanese yields, leading to continued upward pressure on USD/JPY through global carry-trades, even when the Federal Reserve maintained unchanged policy rates.
Furthermore, when the Bank of Japan initiated rate hikes (by 25 basis points each in July 2006 and February 2007), it triggered pullbacks in USD/JPY, but failed to reverse the momentum driven by global yield-carry trading. Ultimately, the pairing peaked in June 2007, three months prior to the first Fed rate cut in September 2007, illustrating markets’ tendency to anticipate shifts ahead of weakening U.S. data.
UBS suggests that as long as U.S. data remains robust, thereby dampening expectations for Fed rate cuts, upward pressure on USD/JPY is likely to persist. However, the bank notes that pushing the pairing higher becomes increasingly challenging as the exchange rate approaches thresholds that may prompt intervention from Japanese officials.
Moreover, the level of net-short JPY positioning is approaching record levels last observed in 2007, coinciding with a peak in USD/JPY.
“In this context, we maintain our view for a medium-term decline in USD/JPY,” the bank stated. “We anticipate the Fed to commence rate cuts from September, and the BoJ to raise rates either in July or October, with further tightening probable in 2025. A narrowing of the yield differential should exert downward pressure on the pairing, consistent with the trend observed in 2007.”
UBS forecasts USD/JPY to decrease to ¥148 by the year’s end, positing that a rise to ¥160 would likely trigger potential FX intervention once more.
Nevertheless, if strong U.S. data prompts the Federal Reserve to hike rates this year, USD/JPY is anticipated to surpass 160 yen.