Investing.com — The dollar has dominated the yen this year as the Federal Reserve and Bank of Japan implement contrasting monetary policy measures, and now there is growing risk that the dollar overshoots ahead of an expected correction in the first quarter of next year, strategists say of BofA said in a recent note.
“We are structurally bullish on the USD/JPY, but expect a correction in 1Q25 on heightened US policy uncertainties,” BofA noted, although flagging the risk of USD/JPY overshooting as bets on an interest rate hike from the Bank of Japan (BoJ) fades away. .
USD/JPY rose above 153 last week as the market priced in expectations for a BoJ rate hike at the December meeting, the strategist said.
This pricing fell from over 60% at the end of November to just 16% now, following media reports indicating that the BoJ is inclined to keep interest rates unchanged due to uncertainties surrounding US economic policy and wage developments.
The declining chances of a rate hike by the BoJ increase the risk of an overshoot in the USD/JPY, potentially prompting currency intervention by Japan’s Ministry of Finance ahead of the BOJ’s January monetary policy meeting. said the strategists.
If the USD/JPY trades close to 155 before the BoJ’s December meeting, the lack of a rate hike could impact market perceptions regarding Japan’s currency policy. “The FX market would interpret recent media reports as the BoJ being fine with USD/JPY being anywhere below 155,” she added.
In the run-up to the BoJ meeting in December
From December 18 to 19, the BofA strategist expects that if USD/JPY rises after the meeting, intervention risks could be limited due to the lean liquidity conditions that characterize year-end trading.
