UBS sees a potential shift in the currency pair’s trajectory.
Analysts at UBS suggest that the Japanese yen, which has seen significant weakness, is on track for a reversal.
This outlook is based on increased concerns among Japanese policymakers and businesses about the negative impact of the yen’s depreciation on the country’s economy.
The report cites a recent survey of local small and medium-sized enterprises (SMEs), which are a major employment sector in Japan and employ around 70% of the workforce. The survey results showed that 35% of respondents experienced negative sales impacts due to yen weakness, and a significant 63.9% reported negative earnings impacts.
Additionally, half of the companies surveyed indicated that an “appropriate level” for USDJPY would be between 110 and 120, as opposed to the higher levels the currency pair has seen recently.
UBS points to the upcoming Bank of Japan (BoJ) meeting on June 14 as a critical event that could impact the direction of the yen. The firm interprets the BoJ’s tolerance of rising Japanese government bond (JGB) yields, which have reached an 11-year peak of 1%, as a sign of a possible aggressive policy shift.
UBS expects BoJ Governor Ueda could signal willingness to initiate a rate hike cycle, with expectations of a policy rate hike from 0-0.1% to 0.25% in July possibly followed by two additional increases of 25 basis points in 2025.
Given the potential for a more hawkish stance from the BoJ and signs of slowing US jobs and inflation data, UBS maintains a downward trajectory for the USD/JPY.
They believe that a peak around 160 is likely for the currency pair, with a decline expected in the medium term.
The report outlines possible limits for the USD/JPY and suggests that a rise to 157.5–160 could lead to currency intervention, while a fall to 150–152 could attract demand for yield-carry trades.
However, UBS also notes that if US economic data shows no signs of moderating, the USD/JPY could remain at its elevated levels.
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