USD/JPY: Intervention is the main downside risk

Analysts at MUFG Bank, hold a bullish bias for the USD/JPY pair, reflecting the fact that the US rates market is unlikely to correct dramatically lower over the very short term. They see the pair trading between 130.00 and 138.50 during the weeks ahead.

Key Quotes:

“Risk-off and general tighter financial conditions remain a key catalyst for further US dollar strength. The historic norm of USD/JPY falling in those market conditions will only return if risk-off starts to influence US yields lower. That has not been the case so far this year and hence the risk correlation with JPY is less robust. We do not expect that to change over the short-term and hence we hold a bullish bias on USD/JPY direction over the short-term. Elevated US rates and JPY valuation should limit the scale of JPY depreciation from here. Furthermore,

“The statement this month from the BoJ/MoF/FSA expressing concern over JPY depreciation may act to slow or curtail JPY depreciation at higher levels closer to 140.00. In addition, continued concerns over inflation and limited scope for US rates to correct lower should provide support for USD/JPY, especially if rates volatility eases and Japan investor buying of UST bonds starts to pick up again.”

“The main downside risk for USD/JPY in the month ahead would be if the scale of JPY weakness finally triggers a joint policy response from the government and BoJ. But the scale of JGB buying by the BoJ last week suggests action to limit yen weakness is unlikely over the short-term. A sharper correction in US rates lower is another key downside risk and while we expect that to materialize later, it is premature to expect that over the short-term with the primary focus of the Fed still on tackling upside inflation risks.”

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