Citi has commented on the currency pair, drawing parallels to historical currency movements and predicting potential future trends. The financial services provider suggested that while the upside for the USD/JPY is more limited than initially expected, the pair is unlikely to fall below ¥140/$ until next year.
Citi expects a possible recovery to between ¥151/$ and ¥155/$ before a significant decline.
The company’s analysis shows that the USD/JPY has pre-emptively taken into account a contraction of the interest rate spread to around 4%. They expect the next significant drop in the pair’s value to occur after the actual US-Japan interest rate differential narrows to well below 4%, a scenario they say could unfold over the next six months. Looking further ahead, Citi’s forecasts for the USDJPY are below ¥140/$ in 2025, ¥130/$ in 2026 and ¥120/$ in 2027.
Citi also pointed to the sharp decline in the USD/JPY during the 1998 LTCM crisis as a historical precedent, noting the currency pair’s significant decline after periods of uptrend, driven by the carry trade in the Japanese Yen ( JPY) in 1998 and 2007. The firm suggests that the USDJPY could face a similar risk of a 30%-40% correction within a few years or even months as observed in the past.
The commentary highlighted that the USD/JPY had historically risen when the interest rate differential rose above 4.75%, and tended to fall when the interest rate differential fell below this threshold. Citi pointed out that the current large interest rate differential and high carry/volatility ratio could lead to a temporary revival of the carry trade in the JPY.
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