Synopsis:

HSBC believes the recent USD/JPY decline may not extend further, as rate differentials suggest the pair should be trading higher. While speculative positioning has turned net long JPY, it is not extreme enough to trigger a major unwinding or a sudden surge in USD/JPY.

Key Points:

1️⃣ Rate Differentials Suggest USD/JPY Should Be Higher 📊

• The recent drop in USD/JPY appears stretched relative to yield shifts in January and February.
• If 2024’s FX-rate relationship holds, USD/JPY should be trading higher than current levels.

2️⃣ Speculative Positioning Caught Up Late to the JPY Rally 📈

• Speculative flows were slow to jump on the bullish JPY move in January.
• However, IMM data shows a net long JPY positioning, suggesting less room for further buying.

3️⃣ No Clear Catalyst for a Sharp Move in Either Direction ⚖️

• Position squaring alone is unlikely to drive USD/JPY lower.
• But valuation mismatches and positioning are not extreme enough to spark a sharp USD/JPY rally either.

Conclusion:

HSBC sees USD/JPY at an inflection point, where further downside may be limited unless there is a major shift in US-Japan rate differentials. At the same time, positioning and valuation do not justify a sudden surge higher, keeping the pair range-bound in the near term.