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Mar 01 - 12:55 PM

RBC: USD/JPY to Reach 145 in Q2 Amid BoJ Tightening Speculations

By eFXdata  —  Mar 01 - 10:45 AM

Synopsis:

RBC outlines its outlook for USD/JPY, targeting the pair at 145 in Q2 2024. Despite a consensus shift towards expecting a significant USD/JPY sell-off, RBC remains cautious, citing the Federal Reserve's hesitance to cut rates and robust US economic momentum as key factors underpinning the pair. The Bank of Japan's (BoJ) deliberations on exit strategies from ultra-loose monetary policies further add to the complexity, with market pricing indicative of a more aggressive BoJ tightening than previously anticipated.

Key Points:

  • Fed's Rate Policy: The Federal Reserve's cautious approach towards rate cuts, coupled with stronger-than-expected US economic performance, provides a bullish backdrop for USD/JPY.

  • BoJ's Tightening Prospects: Recent BoJ discussions signal a readiness to consider exit strategies, marking a significant shift in policy outlook. Market expectations now price in a 10bp hike by June and a full 25bp by the end of 2024.

  • Hedging Dynamics: The differential between hedging costs and yields on Japan's foreign asset stock remains elevated, potentially sustaining USD/JPY levels even as the Fed commences rate cuts.

  • Positioning Risks: USD/JPY is currently a popular long position, posing risks of volatility around BoJ policy announcements. RBC anticipates potential dips as opportunities to buy into USD/JPY.

Conclusion:

RBC's analysis suggests a bullish outlook for USD/JPY, targeting 145 in Q2 2024 amidst evolving monetary policy dynamics in both the US and Japan. While the consensus leans towards expecting a depreciation in USD/JPY, RBC advises caution, emphasizing the impact of the Fed's policy stance and BoJ tightening discussions. Investors are advised to view potential pullbacks in USD/JPY as buying opportunities, with positioning and hedging considerations playing crucial roles in the currency pair's trajectory.

Source:
RBC Research/Market Commentary

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