Substantial rally in yen unlikely - Capital Economics

The Japanese yen has been on the rise of late, boosted by the dip in US Treasury yields, and Capital Economics expects it to rally further in 2025.

At 10:20 ET (15:20 GMT), USD/JPY fell 0.4% to ¥155.74, trading not far away from its weakest level since Dec. 19.  

“One of the key beneficiaries of the dip in US Treasury yields since the December US CPI print has been the yen,” said analysts at Capital Economics, in a note dated Jan. 16.

“That’s perhaps not surprising - the rise in Treasury yields, which had far outpaced that of JGB yields, had been a key driver of the recent pressure on that currency.”

Some hawkish comments by Bank of Japan officials, including Governor Ueda and Deputy Governor Himino, as well as media leaks seemingly confirming that the central bank will hike next Friday, have probably helped the yen too.

The Japanese currency is still very weak against the dollar, but with US Treasury yields perhaps turning around a corner, could we be at the start of a renewed yen rally?

Capital Economics has doubts.

“We suspect that huge gains, such as those we saw in mid-2204, aren’t on the cards this time around,” Capital Economics said, adding that two of the key factors that fuelled that rally don’t seem to be present now.

For one, although the group thinks Treasury yields will fall, it doesn’t expect them to fall particularly far.

“The Fed seems to be almost done with its easing cycle: we think it will cut by another 50 bps, of which 40 bps seems already priced in. That, on its own, probably wouldn’t give the yen a huge boost,” Capital Economics said.

What’s more, although positioning isn’t as stretched, the broader valuation of the yen is still quite low. The real effective exchange rate, for example, is still quite weak when compared with its past. 

But, Capital Economics wouldn’t rule out a rally completely. For a start, the group still thinks the Bank of Japan could spring a hawkish surprise.

“All that suggests to us that further gains are on the cards for yen, even if they might seem tepid compared to those it saw in mid-2024. Our end-year target for the currency is ¥145.”

 

Source: Investing.com