USD/JPY: Japanese yen remains vulnerable – Rabobank

The USD/JPY could move toward 125.00 later in 2022, according to analysts at Rabobank. They warn the market has priced in a lot of interest rate hikes from the Federal Reserve, which may limit the appreciation of the pair. 

Key Quotes: 

“Having briefly hit the USD/JPY125 level earlier in the week, USD/JPY has been knocked by a bout of profit-taking.  Yesterday’s decline in yields on shorter-dated US government paper supported the move lower in USD/JPY.  Softer oil prices which can in part be linked with yesterday’s flurry of hopes regarding progress in peace talk between Ukraine and Russia have also contributed to the better tone on the JPY.  The fact that this news happened to coincide with reports of a meeting between BoJ Governor Kuroda and PM Kishida was another persuading element in the drop in the value of USD/JPY.  That said, the factors that has driven USD/JPY in recent weeks essentially remain in place.  Consequently, the JPY remains vulnerable.”

“While interest rate differentials are supportive of USD/JPY, the market has priced in a lot of Fed rate rises.  On a one year view the money market is currently positioned for rate rises totalling around 240 bps.  This may mean scope for additional upside in short-dated US yields is limited.  If US short-term US rates struggle to make further headway, this may limit or slow the pace of further appreciation of USD/JPY. “

“While actual FX intervention from Japan is unlikely, the authorities could be minded to make use of investors’ fear of a move to calm the market. News that BoJ Kuroda and PM Kishida were scheduled to meet this week certainly appeared to shake out short JPY positions.  Subsequently Kuroda played down speculation that JPY weakness was a concern for the authorities.”

“We see scope for USD/JPY to move back towards 125 in the latter half of the year.”