USD/JPY: Neural in the short-term, US yields set to remain in a range – MUFG

Analysts at MUFG Bank see the USD/JPY pair with a neutral bias and expect it to trade in the 103.00-111.00 range over the next weeks. They point out that like US yields, the US dollar may well enter a phase of range-trading and consolidation before more notable depreciation takes hold later in the year.

Key Quotes:

“Last month, we turned neutral on the USD/JPY outlook after a long period of bearishness – the period since last month has seen USD/JPY first advance to a high of 110.97 on 31st March before reversing sharply. USD/JPY is now trading lower than a month ago primarily reflecting the decline seen in UST bond yields. After gaining 34bps during March, the UST bond 10-year yield has declined 12bps in April. Our own correlation analysis indicates that USD/JPY is the most sensitive currency pair to movements in US yields.”

“Japan-specific developments would have the potential to disrupt this correlation and while there are risks we do not see anything on the horizon that could drive JPY direction independently of developments abroad and in the US specifically. A new COVID wave of infections is hitting Japan as we write with the 7-day average of daily infections up from around 1,000 in early March to 4,000 now. The potential for further restrictions hitting economic growth is rising and this could have implications for the currency. However, with the BoJ scope for easing policy limited, we see the net impact of this risk as deflationary and hence for Japan, higher real yields help provide support for the yen. In essence, as history shows, weaker growth can actually provide support for the yen.”

“With limited prospects of monetary easing by the BoJ we doubt the yen will be influenced much by domestic factors specifically. Of course portfolio flows will remain important but the shape of the US yield curve is more geared toward greater hedged outflows from Japan as we start the new fiscal year.”

“Yield consolidation in the US should mean USD/JPY consolidation too and hence our neutral bias for the outlook.”