USD/JPY: Gains should become more limited – MUFG

Analysts at MUFG Bank point out that the weakens of the Japanese yen is reaching its limits. They forecast USD/JPY at 117.00 by the end of the first quarter and at 116.00 by the end of the second. 

Key Quotes:

“The yen depreciated by 10.3% versus the US dollar in 2021, the worst performance amongst G10 currencies. Strong risk appetite resulting in impressive performances for global equity markets coupled with rising US yields helped fuel the gains. We see scope for this momentum to continue in the early part of this year. US yields look set to advance further and overall G10 central bank policy support will help keep financial market conditions favourable, especially if as expected Omicron continues to recede as a global risk. The breach of the key technical resistance around the 117.00 level (long-term trendline from 1990 and 2015 highs) could see a lurch higher and a move toward the key 120.00 level. If this scenario was to unfold, we believe it would mark the final phase of this move higher in USD/JPY.”

“As we approach the timing of the first rate increase in the US, the market is likely to be well priced (or overpriced) for Fed action and from that point we would see scope for a start of a reversal.”

“In BoJ REER (Real Effective Exchange Rate) terms, the yen has just broken below the 2015 low to reach levels last recorded way back in 1972. With greater financial market volatility this year, coupled with Japan’s large current account surplus and a relatively attractive real yield, we believe the depreciation of the yen will soon hit its limit.