On Friday, UBS analysts provided their insights on the USD/JPY currency pair, noting a significant drop to an intra-day low of 140.7 earlier in the week. The decrease in value was attributed to a combination of falling US yields and the pair breaking below the critical technical support level of 141.7, which led to stop-loss selling.
UBS forecasts for the USD/JPY are set at 147 by December 24, 2023, 143 by March 25, 2024, 140 by June 25, 2024, and 138 by September 25, 2024. The analysts pointed out that the current trading level is slightly below what would be expected based on 10-year real yield differentials, suggesting that the currency pair should be closer to 143 rather than 141.
The firm believes that the USD/JPY appears oversold for several reasons and anticipates a short-term recovery to the 143-147 range. They argue that the recent reduction in US bond yields, with 2-year and 10-year yields at 3.57% and 3.62% respectively, seems excessive compared to their December 2024 targets of 3.75% and 3.85%.
Additionally, market expectations of Federal Reserve rate cuts are considered aggressive, with interest rate futures pricing in 116 basis points of cuts by December 2024, which is more than UBS's expectation of 100 basis points.
The analysis also highlighted that leveraged FX market positions have shifted to net-long Japanese yen, a stance they view as unsustainable based on historical trends. The only times net long yen positions have been maintained over the past decade were during periods of global risk aversion or when the Federal Reserve maintained very low policy rates.
Despite the short-term prospect for a bounce in the USD/JPY, UBS maintains that the currency pair is in a medium-term downtrend and advises investors to sell on rallies. The firm also outlined potential near-term risks, including the possibility of a disappointing US retail sales report due on September 17, 2024, or the election of a new Japanese Prime Minister on September 27, 2024, who might advocate for quicker Bank of Japan tightening.
InvestingPro Insights
In light of the UBS analysis on the USD/JPY currency pair, recent data from InvestingPro provides additional context to the currency's performance. The US Dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, has seen a downward trend over various timeframes. Specifically, the DXY has experienced a 1-week price total return of -0.26%, a 1-month return of -1.61%, and a 3-month return of -4.07%. Over the past six months, the return was -1.83%, while the year-to-date return stands at -0.46% as of the 257th day of 2024. The previous close price of the DXY was 101.37 USD.
These metrics are particularly relevant as they reflect broader movements in the US dollar that could impact currency pairs like USD/JPY. A weakening dollar index could lend support to UBS's forecast of a potential short-term recovery in the USD/JPY pair. Additionally, the InvestingPro Tips suggest investors monitor key economic indicators and geopolitical events that may influence market sentiment and currency valuations. As UBS notes potential risks such as US retail sales reports and political changes in Japan, these factors could indeed sway the direction of the USD/JPY. For those looking for further insights, InvestingPro offers additional tips on currency trading strategies and market analysis.
For readers interested in delving deeper into currency trends and strategies, InvestingPro has numerous additional tips available, providing a comprehensive toolset for informed decision-making in the forex market.
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