Barclays Research discusses USD/JPY outlook and expects the cross to peak around current levels before staging a gradual decline towards 107 in Q2 and 104 in Q3.
"JPY is likely to outperform most currencies, with its improved risk-adjusted relative return due to compression of global yields towards their effective lower bound amid heightened uncertainty related to COVID-19 impact on growth. While extraordinary dollar liquidity demand and US fiscal stimulus expectations could limit the scope for decline in USDJPY, downside risks to the pair is likely to increase over time as the liquidity premium for the dollar normalizes and market focus shifts to growth weakness following COVID-19. The concurrent attraction of USD and JPY leaves cross-JPY pairs more prone to the downside on further deterioration in risk sentiment,"Barclays notes.
"In the medium term, we expect JPY appreciation pressures to gradually alleviate, with fading uncertainty premium and eventual global growth recovery, supported by monetary and fiscal easing. Relative growth outperformance of the US is also likely to support USDJPY. However, the scope for USDJPY rebound is likely capped by persistent compression in yield differentials, Japan’s expected improvement in current account due to lower oil prices, cautious outward investment stance both in M&A and portfolio, and US election uncertainty," Barclays adds.