Senior Analyst at Danske Bank Morten Helt sees the pair edging higher to the 116.00 handle in the medium to long term.
“USD/JPY has rallied sharply since mid-April, as equity markets and US yields have rebounded. We still think it is likely that the Fed will hike at the July meeting and as a Fed rate hike in June is now priced at nearly 80% probability and USD/JPY looks increasingly overbought from a technical point of view, we expect the appreciation momentum to ease in the near term”.
“We now target USD/JPY at 114 in 1-3M (revised higher from 110 and 112, respectively). Essentially, the key driver for the cross remains relative interest rates – most notably the 10Y US yield – and risk appetite in general and, given the current divergence between commodity and equity markets, we see risks mainly skewed on the downside in the coming one to three months. Longer term, the current level in USD/JPY is justified from a relative rates point of view”.
“We target the cross at 116 in 6-12M, as we expect the widening interest rate spread between the US and Japan to outweigh the underlying fundamental USD/JPY depreciation pressure stemming from valuation and current-account flows”.