USD/JPY: Upside is limited, yen to depreciate more against non-dollar currencies – MUFG

Yen underperformance remains the most consistent feature in the foreign exchange market this year and it was pronounced again in May with the yen the worst performing G10 currency. However, in the view of economists at MUFG Bank, upside potential in USD/JPY is limited.

Overall JPY weakness makes sense as the global economy picks up 

“Cross-currency basis is historically very narrow while the US yield curve is steep suggesting attractive conditions for increased hedged inflows to the US. We also see scope for US 10yr yields to fall further in the coming months which would put further downward pressure on USD/JPY.”

“The BoJ NEER has now declined in 6 out of the last 7 months and while we suspect USD/JPY is stretched, weakness on a trade-weighted basis should extend further.”

“We see limited further upside for USD/JPY from here and given the global synchronised upturn underway we see yen depreciation better expressed through non-dollar currencies through the remainder of 2021.”