Synopsis:

RBC expects continued downside in USD/JPY, forecasting the pair to fall below 120 by the end of 2026. The yen is poised to benefit from its sensitivity to the front end of the US yield curve, and ongoing reductions in FX hedge ratios by global investors.

Key Points:

• Yield Curve Dynamics: The JPY remains highly leveraged to US front-end rates, and as those decline, yen strength is expected to persist.

• Positioning Dynamics: While negative carry still deters speculative short USD/JPY trades, RBC expects the pair to underperform the forward curve over both 2025 and 2026.

• Hedging Behavior: Declining hedge ratios by institutional investors are likely to amplify JPY appreciation pressures over time.

Conclusion:

RBC maintains a bearish medium-term view on USD/JPY, driven by yield compression and evolving investor behavior. Their end-2026 target of 120 reflects confidence in a structural shift favoring JPY strength as the US rate advantage continues to narrow.