USD/JPY: Heading for 140 in the short term, then to decline – MUFG

Analysts at MUFG Bank forecast the USD/JPY pair to end the third quarter at 135 and the year at 131.00. However, in the short-term they see the pair likely to rise to 140. 

Key Quotes:

“The dollar strengthened across the board as the Fed turned hawkish in response to an unexpected pickup in inflation, while the yen weakened due the divergence in monetary policy in Japan and other countries. The USD/JPY rose to touch 137, with 140 now in view given the Fed's unwaveringly hawkish stance should keep the dollar strong in the near term. However, the possibility of recession in the US could constrain a further widening of the interest rate differential between Japan and the US, which has been driving the USD/JPY's rise. We expect the USD/JPY's current rise to peak in Jul–Sep due to a slowdown in the US economy.”

“The interest rate differential in the intermediate sector, which tends to reflect the near-term outlook for monetary policy, has driven the USD/JPY higher since last year. The current level already looks strained, but we expect a narrowing of interest rate differentials would weigh on the USD/JPY if expectations of a decline US interest rates in anticipation of changes in the US economy becomes the mainstream view.” 

“We expect the possibility of government intervention in the forex market to stop the yen from weakening will come into view if the USD/JPY passes 140. The last time Japanese authorities conducted yen-buying intervention was in June 1998, when the USD/JPY was above 140. The USD/JPY has been driven higher by the interest rate differential between Japan and the US. Now that this driver has started to lose momentum, we think growing concerns about intervention should act as an automatic brake on upside when the USD/JPY passes 140.”