MUFG Research discusses JPY outlook ahead of this week's BoJ policy meeting.
"Our report revealed a large divergence between our short-term regression model valuation for USD/JPY and spot with the spot undershooting fair-value by a large amount – over 6%. We would conclude from that, that this reflects FX speculation for a change in YCC this week. When we input changes to the regression model for JGB yields that imply higher levels and another change in YCC, the valuation gap closes considerably," MUFG notes.
"We are not suggesting USD/JPY won’t go lower on a YCC policy change but certainly the sharp decline in spot last week does suggest the FX market is positioned to some degree for a change this week. A no-change policy announcement will likely lead to a notable jump," MUFG adds.