USD/JPY: Near-term direction could be more supportive of a higher dollar – MUFG

Analysts at MUFG Bank, expect the USD/JPY pair to trade in the 107.00/114.00 range over the next weeks. They point out the actions of the Federal Reserve matter most given the limited scope for any meaningful change in the monetary policy stance of the Bank of Japan. 

Key Quotes:

“While we remain sceptical of the ability of the yen to weaken on a sustained basis given the sustained low levels of inflation relative to other countries and given its historically sizeable current account surplus, the nearer term direction could be more supportive of a higher USD/JPY. Firstly, yields in the US are unlikely to drop considerably lower from here and will ultimately end the year at higher levels.”

“Secondly, the technical picture is more favourable. The long-term downtrend from the high above 125.00 in 2015 and the post-pandemic high just above 112.00 has been broken on a more sustained basis and opens up the prospect of a further move higher over the short-term. Thirdly, we remain bullish crude oil prices and based on our updated FX correlation, USD/JPY is the only currency pair showing a positive US dollar correlation with crude oil prices and in a way reflects the negative correlation link between the yen and global reflation. In short, we do not expect reflation trades to continue unravelling like they have since the FOMC meeting.”

“So we take a cautiously bullish view for USD/JPY over the short-term. We say cautious given our broader view we believe remains consistent with a gradual strengthening of the yen. We also forecast the US dollar more generally to weaken back modestly and that will limit the upside for the dollar. However, the window of US dollar strength opened by the Fed last week is perhaps with us over the coming weeks.”