Synopsis:

ANZ remains structurally bearish on USD/JPY, expecting Japan’s firm inflation and wage growth to drive further BoJ rate hikes in 2025. However, overextended short positioning and negative risk reversals in FX options suggest that near-term JPY strength may be difficult to sustain, creating opportunities for tactical long USD/JPY trades.

Key Insights:

1️⃣ Fundamental Case for a Lower USD/JPY 🔻

• Japan leads the G10 in inflation and economic surprise indices.
• Wage pressures are growing, supporting the case for further BoJ rate hikes in 2025.
• A narrowing US-Japan yield spread should favor JPY appreciation over time.

2️⃣ Market Positioning is Already Long JPY 📊

• CFTC non-commercial data (Feb 18) shows record-high USD/JPY shorts.
• FX options pricing reflects growing expectations of long-term JPY gains.
• 9-month risk reversals are the most negative since October 2024, signaling increased demand for JPY calls.

3️⃣ USD/JPY Has Been Resilient Despite Yield Moves 🤔

• Even with the US-Japan yield spread tightening, USD/JPY has only just dropped past 150.
• This suggests that JPY positioning is stretched, and further gains may be harder to achieve in the short term.

4️⃣ Bumpy Path Lower—Tactical Longs in USD/JPY Possible 🎢

• While ANZ still expects USD/JPY to decline over 2025,
• Short squeezes and positioning unwinds could create short-term rallies in the pair.
• These temporary rebounds may provide tactical opportunities to go long USD/JPY before resuming the downtrend.

Conclusion:

ANZ maintains a strategic bearish outlook on USD/JPY, but given overcrowded JPY positioning, near-term dips in the pair could present opportunities for tactical long trades before the broader downtrend resumes.