USD/JPY may continue to trade higher – OCBC

USD/JPY resumed its rise last week. Economists at OCBC Bank analyze the pair’s outlook.

USD/JPY to trade lower beyond the near term

With no imminent BoJ shift, markets could revert back to trading USD/JPY higher. Currency pair is still largely a story of yield differentials and with Treasury yields still higher and UST-JGB yield differentials still wide/ widening, the USD/JPY may continue to trade higher. This puts focus on potential leaning against the wind activities, should the pace of rise become one-sided and excessive.

Beyond the near term, we expect USD/JPY to trade lower on the back of a moderate-to-soft USD profile (as Fed tightening stretches into late cycle and that USD can fall when pause or pivot comes into play) and on expectation for further BoJ shift towards policy normalisation amid higher inflationary and wage pressures in Japan.