This post was originally published on this site.
For the better part of a week already, USD/JPY continues to hover around 158.50 to 159.50 but mostly weaving in and around the 159.00 mark. It is the same case again today, despite a more tepid dollar mood to start the new week. As much as the dollar may be seeing some signs of weakness, the yen is also staying under pressure as the fundamental landscape is unchanged. The only difference now is that there is a more threatening look to the intervention playbook.
As such, that is keeping USD/JPY price action on edge at the moment. Push things too far and closer to 160, and that will risk incurring the wrath of another potential joint intervention play. But all else being equal, the path of least resistance continues to point to a softer yen in all likelihood.
This mixed sentiment is also seeing analysts remain divided on what is to come for Japanese currency next.
BofA was one to argue previously that there’s a good chance for USD/JPY to track back towards 149 by year-end here. However, they are now arguing that the balance of risks is starting to shift against that view:
“More than a week has passed since the joint US-Japan FX intervention. So far, the operation appears relatively successful as, compared with previous episodes, investors have been reluctant to fade the rally. Indeed, the authorities’ strong commitment and the high cost of failure have strengthened our bullish conviction on the JPY, and we recently revised our year-end USD/JPY forecast to 149 from 152.
However, our quant signals raise some red flags for near-term JPY strength. Last week we saw an aggressive mean reversion in JPY skew, and option flow moved strongly in favor of JPY puts vs EUR and AUD, indicating that investors are moderating their worries on further upside. Additionally, our technical matrix has yet to trigger any positioning trend signals, while up/down vol and residual skew indicate that positioning and short-term sentiment are not yet supportive of the uptrend. Finally, our time-zone analysis indicates that JPY buying was not broad-based last week, with USD/JPY finding consistent support during US trading hours”
On the flip side though, Goldman Sachs is arguing that there could be further unwinding in yen shorts on the right set of conditions:
“Japan’s largest FX intervention in 15 years forced a sharp reduction in tactical JPY carry positions- even bigger than the initial unwind after the July 2024 operations. But the less JPY-positive macro backdrop likely in part explains why USD/JPY has already reversed nearly half of its initial decline.
Despite the significant drop in speculative positioning, more unwinds can follow if the right conditions align. Positioning could even flip net long if the macro and market backdrop argues for a stronger JPY, as it did in July-August 2024. Recession risk is much lower today than in the summer of 2024, and a bullish shift in JPY sentiment often requires the emergence of growth concerns.
But markets now view a September Bank of Japan hike as roughly 75% likely, and a faster pace of hikes could keep the JPY stronger for longer without a shift in the global growth backdrop.”
That final point is an interesting one though. It is not quite as strong as an argument in favour of supporting the yen as one might think, at least in my own view. From previously: Three reasons why BOJ rate hikes will not save the yen
That unless the BOJ decides to go nuclear, which would be off-brand and extremely reckless. So, I wouldn’t expect that whatsoever.
In supporting that view, JP Morgan is one that also doesn’t see BOJ rate hikes as being a game changer for the yen:
“Rate hike expectations have increased not only at the front-end but also further out the curve. However, this has not translated into yen appreciation; instead, the relationship between BOJ hike expectations and JPY has become a negative correlation.
Our Japan economists have revised their forecast to reflect a somewhat faster tightening pace by the BOJ, expecting the policy rate to reach 2% by end-2027. However: (1) a move to 2% is already largely priced in, and (2) the negative correlation between BOJ hike expectations and JPY is likely to persist for the time being.
Therefore, we think that a faster BOJ hiking path will only have a limited impact on our medium-to-long-term yen-weakness view. We keep our year-end USD/JPY target unchanged at 164.”
This article was written by Justin Low at investinglive.com.
