Citi provided commentary on the currency pair, drawing parallels with historical currency movements and forecasting potential future trends. The financial services firm noted that while the USD/JPY uptrend has been more restrained than initially anticipated, the pair is unlikely to fall below 140 JPY/USD until next year.
Citi expects a possible recovery in the dollar to between 151 and 155 yen before any major decline.
The firm’s analysis suggests that USD/JPY has already priced in the interest rate differential to around 4%. The firm expects the next major decline in the pair to come after the effective interest rate differential between the US and Japan narrows to below 4%, a scenario that the firm believes could unfold over the next six months. Looking ahead, Citi’s USD/JPY forecasts are below ¥140/USD in 2025, ¥130/USD in 2026 and ¥120/USD in 2027.
Citi also pointed to the sharp decline in USD/JPY during the 1998 Long-Term Capital Management crisis as a historical precedent, noting the currency pair’s large decline after periods of yen-led bullishness in 1998 and 2007. The firm notes that USD/JPY could face a similar risk of a 30% to 40% correction within a few years or even months, as has been seen in the past.
The commentary highlighted that USD/JPY has historically risen when the interest rate differential exceeds 4.75% and tends to fall when the differential is below this threshold. Citi noted that the current wide interest rate differential and high yield/volatility ratio could lead to a temporary recovery in the JPY yield trade.
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