Synopsis:

Credit Agricole sees potential for a rally in USD/JPY this week, driven by market reactions to Fed Chair Jerome Powell's upcoming speech at Jackson Hole, as investors position around US-Japan rate differentials.

Key Points:

• Current Market Positioning:

  • Investors are currently betting on a further narrowing of the US-Japan rates differential, anticipating a dovish message from Powell and a hawkish stance from BoJ Governor Kazuo Ueda.

• Key Driver:

  • The main driver of USD/JPY is expected to remain the UST yield side of the US-Japan rates spread, with Credit Agricole suggesting that the market may be overly aggressive in pricing in Fed rate cuts.

• Potential Rally:

  • Powell’s speech at Jackson Hole could prompt a correction in this aggressive pricing, potentially leading to a USD/JPY rally. The 150 level remains a significant hurdle for the exchange rate.

Conclusion:

Credit Agricole expects that the USD/JPY could rally following Powell’s speech at Jackson Hole, as the market may reassess its aggressive pricing of Fed rate cuts, with 150 being a critical resistance level.