Investing.com – The yen is struggling to maintain gains against the US dollar, even after official intervention last week, but UBS still sees medium-term downside potential for the pair.
At 10:30 am ET (1430 GMT), USD/JPY was trading 0.1% higher at 155.64 yen, just below the 160 yen level seen last week, the yen’s weakest level so far. against the dollar for 34 years.
The weakness comes despite Japanese authorities spending about $60 billion last week to prop up their currency.
Also on Wednesday, the Bank of Japan issued its strongest warning to date, with Governor Kazuo Ueda saying the bank could take monetary policy action if the yen’s fall significantly affects prices.
UBS looked at the 2006-2007 period, when the yen was also under pressure due to high US bond yields and heavy carry trading.
The Swiss bank noted that when US bond yields reached very attractive levels (eg >5%) compared to low Japanese bond yields, global carry trades continued to push USD/JPY higher even as the Fed kept interest rates unchanged.
Additionally, when the Bank of Japan finally began raising rates (by 25 basis points in July 2006 and February 2007), it triggered a pullback in USD/JPY but failed to reverse the forces of global yield pass-through trading.
The pair finally peaked in June 2007, three months before the Fed’s first rate cut in September 2007. This is because markets tend to move forward once US data begins to weaken.
This suggests that as long as US data remains strong, dampening expectations for a Fed rate cut, there will be upward pressure on USD/JPY. However, we also believe that markets are finding it increasingly difficult to push the pair higher as the exchange rate has reached a pain point for Japanese officials.
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Moreover, JPY net short interest levels are testing record levels last seen in 2007, which also coincided with the USD/JPY peak.
“In this context, we maintain our view of a medium-term decline in the USD/JPY pair,” the bank said. “We expect the Fed to cut rates starting in September and the Bank of Japan to raise rates in either July or October, with tightening more likely in 2025. The narrowing of the yield differential should put downward pressure on the pair, just like what happened. in 2007.”
The bank expects USD/JPY to fall to 148 yen by the end of the year, saying a rise to 160 yen should again attract potential currency intervention.
However, if strong US data forces the Federal Reserve to hike rates this year, USD/JPY is likely to rise above 160.