Synopsis:

Danske Bank expects USD/JPY to remain under pressure, with the market likely adopting a "sell the rallies" approach. The recent appreciation of the Japanese yen, driven by global factors such as lower US rates, declining oil prices, and unwinding of carry trades, is expected to continue influencing the pair.

Key Points:

1. Recent JPY Appreciation:

   • The Japanese yen has appreciated by around 10% against the USD since July 1st, pushing USD/JPY below the 150 level.
   • Factors supporting this appreciation include lower US rates, declining oil prices, unwinding of carry trades, strategic Japanese FX intervention, and a hawkish hike by the BoJ.

2. Influence of Global Factors:

   • Global factors, particularly changes in US yields and oil prices, are currently more influential on the JPY than domestic developments in Japan.
   • Narrowing rate differentials between Japan and other G10 economies have provided a significant tailwind for the JPY.

3. Market Sentiment:

   • Danske believes there is further room for USD/JPY to decline over the strategic horizon, with the market likely to remain in "sell the rallies" mode.
   • The possibility of more volatile times and the tail risk of a US recession could lead to a sharp decline in USD/JPY, even if the BoJ halts further hikes.

4. Near-Term Outlook:

   • Despite the recent rally in the yen, a temporary reversal could occur if the dovish repricing of the Fed reverses.
   • USD/JPY briefly dipped to 141.70 last week before bouncing back above 145.00, and Danske expects the market to sell into any significant bounce.

Conclusion:

Danske Bank expects USD/JPY to face continued pressure, with the market likely selling into rallies. The yen's appreciation has been driven by global factors, and there is further room for decline over the strategic horizon. However, in the near term, a temporary reversal could occur if the Fed's dovish repricing reverses.