Investing.com – The Japanese yen has been on the rise lately, boosted by the decline in US Treasury yields, and Capital Economics expects it to rise further in 2025.
At 10:20 ET (15:20 GMT), the price fell 0.4% to ¥155.74, trading not far from its weakest level since December 19.
“One of the main beneficiaries of the decline in U.S. Treasury yields since the December U.S. CPI print has been the yen,” Capital Economics analysts said in a Jan. 16 note.
“That is perhaps not surprising: the rise in government bond yields, which had largely exceeded that of interest rates, was a major driver of the recent pressure on that currency.”
Some aggressive comments from Bank of Japan officials, including Governor Ueda and Vice Governor Himino, as well as media leaks seemingly confirming that the central bank will implement a rate hike this Friday, have also likely helped the yen.
The Japanese currency is still very weak against the dollar, but with US Treasury yields possibly around the corner, could we be on the verge of a renewed yen rally?
Capital Economics has doubts.
“We suspect that huge gains like those we saw in mid-2004 are not on the cards this time around,” Capital Economics said, adding that two of the key factors that fueled this rally do not appear to be present. now.
First, even though the group thinks government bond yields will fall, it doesn’t expect them to fall particularly far.
“The Fed appears to be close to completing its easing cycle: we think it will cut another 50 basis points, of which 40 basis points appear to be already priced in. That in itself probably wouldn’t provide a huge boost for the yen,” Capital Economics said.
Furthermore, even if the positioning is not as extensive, the yen’s broader valuation is still quite low. For example, the real effective exchange rate is still quite weak compared to the past.
But Capital Economics does not completely rule out a rally. For starters, the group still thinks the Bank of Japan could pull off an aggressive surprise.
“All this suggests that further gains for the yen are in store, even if they may seem tepid compared to mid-2024. Our year-end target for the currency is ¥145.”
