USD/JPY Vulnerable to Increased Selling, Citi Research Warns
In a recent analysis, Citi Research has identified USD/JPY as a pair at risk of further declines in the coming weeks. The currency pair has dropped sharply over the past four weeks, with USD/JPY currently trading at ¥146.88.
The bounce in the pair came after Bank of Japan officials downplayed expectations of additional interest rate hikes, with Deputy Governor Shinichi Uchida stating that the bank will not hike rates during unstable market conditions. Despite this, the yen remains above 38-year lows, driven by record low interest rates in Japan that have fueled the yen carry trade.
The yen carry trade involves borrowing yen to purchase higher-yielding currencies, such as the US dollar, Mexican peso, and New Zealand dollar. However, recent interventions by Japanese authorities to support the yen, along with interest rate hikes by the Bank of Japan, have raised concerns about the sustainability of this trade.
Citi Research analysts believe that the conditions for a downtrend in USD/JPY have not been met, but intervention by the Japanese government has changed the supply and demand dynamics, potentially leading to further downside for the pair. The bank forecasts USD/JPY to decline below ¥140 in 2025, ¥130 in 2026, and ¥120 in 2027.
In conclusion, investors should closely monitor developments in the yen carry trade and the Bank of Japan's monetary policy decisions, as these factors could impact the future direction of USD/JPY. It is important to stay informed and consider the implications of these trends on your investment portfolio.