MUFG Research sees a scope for further short squeeze in the JPY (lower USD/JPY) in the near-term.
"Intensifying fears over a sharper slowdown/recession in the US and globally are finally triggering a reversal of extreme yen weakness. The IMF warned last week that the global economy was “teetering on the edge of recession”. Recession fears and the accompanying drop in US yields has triggered an abrupt correction lower for USD/JPY over the past week. Recent developments have made us more confident that USD/JPY could have already peaked alongside long-term US rates. Market expectations for policy divergence between the Fed and BoJ are now starting to narrow as the US rate market looks ahead and prices in more rate cuts into next year. The US rate market has already moved to price in just over 50bps of rate cuts in 2023," MUFG notes.
"The JPY’s strong rebound also highlights the risk that when the tide does turn for the JPY, weakness could reverse sharply given it is starting from extremely undervalued levels. Leveraged Funds have been scaling back JPY shorts in recent months but there is room for a further short squeeze," MUFG adds.