USD/JPY resumed its rise last week. Economists at OCBC Bank analyze the outlook for the pair.
USD/JPY will trade lower beyond the short term
Without an imminent change from the BoJ, markets could price USD/JPY higher again. The currency pair remains largely a yield spread story and with Treasury yields still higher and UST-JGB yield spreads still wide and widening, USD/JPY could continue to trade higher. This puts the focus on potential leaning activities into the wind, should the rate of climb become one-sided and excessive.
Beyond the near term, we expect USD/JPY to trade lower due to a moderate to soft USD profile (as Fed tightening extends to the end of the cycle and USD may fall when it comes into play a pause or a pivot) and to the expectation of a new turn by the BoJ towards the normalization of monetary policy in a context of greater inflationary and wage pressures in Japan.
Source: Fx Street
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