Credit Agricole CIB Research discusses USD/JPY outlook and flags some reasons behinds its recent decline.
"Several factors will determine whether or not the exchange rate can head higher once again and reach our forecast peak of 118. These factors include:
1. The pace of the Fed’s tightening relative to market expectations; 2. The shape of the UST curve during the coming tightening cycle, which will be determined by both the pace of Fed rate hikes as well as the running down of its balance sheet; 3. The ability of risk-correlated assets to maintain elevated prices in the face of a higher discount rate; and 4. The willingness of Japanese investors to continue to buy USTs unhedged," CACIB notes.
"We are maintaining our forecast trajectory of USD/JPY to finish Q1 at 116 and peak in Q2 and Q3 at 118 before falling back to 116 in Q4," CACIB adds.