Investing.com –The exchange rate, after falling sharply from 162 in early July to 141.7 in early August, has recently stabilized within a range of 143.5 to 149.5.
In a note to clients Wednesday, UBS analysts said: “We believe this range is likely to persist over the next three months for several reasons.” However, looking beyond 2024, UBS predicts a gradual decline in the USDJPY, with the pair likely to reach 138 by September 2025.
The bank maintained its USDJPY forecasts at 147 for December 2024, 143 for March 2025 and 140 for June 2025, with a new target of 138 for September 2025.
This expected downward trend is attributed to several factors. First, speculative positioning in the leveraged FX markets has become somewhat net long on the yen, suggesting that yen shorts may rebuild as global risk sentiment stabilizes.
Furthermore, the near-term downside potential for USD/JPY is somewhat limited as US interest rate markets have priced in around 100 basis points of Federal Reserve rate cuts by the end of 2024.
Furthermore, UBS highlights that the USDJPY has converged with the 10-year real yield differential between the US and Japan, which “could limit further downside potential of the exchange rate.”
“The downside risk to our USDJPY forecast of 147 by end-2024 is that upcoming US economic data (particularly the September 6 non-farm payrolls data) disappoints, which could lead to renewed fears of a US recession and could see the USDJPY retest its early price. August low of 141.7,” the bank added.
Moreover, the upcoming LDP leadership election in Japan on September 27 could bring volatility, especially if Shigeru Ishiba, a candidate seen as positive for the yen, is elected.
“Despite our view on USDJPY stability in the short term, we still expect a downward trend in the medium term, targeting 143 in March 2025, 140 in June 2025 and 138 in September 2025,” UBS said. “With the Fed likely to continue to systematically cut policy rates over the next 12 to 18 months, coupled with gradual rate hikes by the BoJ, the narrowing of US-Japan interest rate differentials is likely to drag the USDJPY down over the medium term.”
