Investing.com — UBS raised its forecast for the stock market in a note on Thursday, expecting significant swings in the exchange rate over the coming year.
The bank now expects the currency pair to reach 155 in December 2024, followed by 152 in March 2025, 150 in June and 147 in September.
By the end of 2025, UBS is targeting 145, a revision from its previous forecasts of 147, 143, 140 and 138 respectively.
According to UBS, a rise to 158-160 remains possible in the short term, especially if the US 10-year yield rises another 30-40 basis points, to a potential level of 4.8%.
“Based on a sensitivity analysis over the past three years, a 10 bp increase in the US-Japan 10-year interest rate spread coincides with a one yen increase in the USDJPY exchange rate,” UBS explains.
If US Treasury yields were indeed to rise to 4.8%, the bank says the USD/JPY could temporarily reach 160, although they view this level as “unsustainable” and likely to invite Japanese intervention, as observed during similar peaks earlier in 2024.
UBS analysts believe that the USD/JPY will face downward pressure in 2025, driven by several factors. A key factor is the Fed’s expected rate cutting cycle, which UBS expects will lead to lower US yields.
“We think current USDJPY levels are higher than warranted by yield differentials,” notes UBS, which estimates the currency pair should move towards 145-146.
Furthermore, trade tensions and a Trump-led administration’s potential focus on a stronger yen could reinforce this trend.
For investors, UBS suggests that any short-term spike towards 160 could be an opportunity to ‘tactically sell USDJPY’. Longer term, UBS sees multiple forces supporting a downtrend, with USD/JPY likely to end at 145 in 2025.
