USD/JPY: Energy shock and flows point higher – MUFG

MUFG analysts see recent Yen weakness as fundamentally justified and expect further downside for the Japanese Yen if the Middle East crisis persists. They argue terms-of-trade deterioration, rising global yields, and increased unhedged foreign equity buying by Japanese households are undermining the currency. MUFG warns USD/JPY could break key resistance and retest the 2024 high near 161.95.

Yen fundamentals deteriorate as crisis deepens

"Since Friday 13th March we have had five separate occasions when Finance Minister Katayama has spoken specifically on foreign exchange, indicating that the government was concerned over the level of the yen and implying that there was a high threat of intervention. Last Monday, Katayama stated that the recent moves of the yen did not reflect the fundamentals and that the MoF would “fully respond” to excessive yen moves."

"The yen rebounded last Thursday in response to the BoJ policy announcement and Governor Ueda’s press conference. However, nearly the entire move reversed on Friday and it’s clear that short-term short yen positions were liquidated on Thursday given Governor Ueda was not as dovish as expected but the speed in which that move reversed underlines the near-term deterioration in yen fundamentals."

"... the terms of trade shock will naturally reduce expectations of a lower USD/JPY while the Fed is now priced at just 50% chance of one cut. In Europe, both the ECB and the BoE are now priced to potentially deliver three to four 25bp rate hikes while the RBA has already delivered two with three more hikes now expected. Global yields are again diverging from Japan and hedging costs are rising not falling which reinforces short-term downside risks for the yen."

"The hope must be that rhetoric will cap the upside. But as is always the case, rhetoric loses its value over time and if we see further energy price rises this week (more likely than not) then USD/JPY will be through the key level and testing the 2024 high of 161.95."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)