USD/JPY: Yen’s slow grind stronger is set to continue – MUFG

Analysts at MUFG Bank, see the USD/JPY pair with a bearish bias for the next weeks and expected it to trade in the 102.00/108.00 range. They point out that if their core assumptions prove correct (a Biden victory, and a last-minute Brexit trade deal) the window for dollar’s strength will soon be closing.

Key Quotes:

“What is clear from recent FX performance is that the Japanese yen continues to perform best in times of risk reduction. The high level of liquidity, the relatively high level of yields in real terms but even in nominal terms, and Japan’s substantial external surplus position continue to attract short-term investor flows in times of greater uncertainty. Global equity markets corrected lower from peaks on or around 2nd September – the current S&P 500 record high. Since then, the yen is the best performing G10 currency, gaining 0.7% versus the dollar – the only G10 currency to advance versus the dollar over the period since then.”

“We believe the task for the Japan authorities of implementing further easing will become more difficult in 2021, relative to the US in particular. Our core assumption for US dollar depreciation in 2021 is that US real yields will fall further fuelled by the toxic mix of deficit-financed fiscal stimulus lifting inflation expectations combined with increased Fed QE to cap nominal yields. With Japan’s scope for matching the US much more limited, the real yield differential is set to move further in favour of Japan. The yen’s slow grind stronger is set to continue.”