Investing.com stock has fallen sharply over the past four weeks, and Citi Research sees the pair as vulnerable to further selling over time.
At 08:55 ET (12:55 GMT), the USD/JPY pair was up 1.8% at 146.88 yen, with the pair rebounding after Bank of Japan officials earlier on Wednesday downplayed expectations of additional interest rate hikes.
Bank of Japan Deputy Governor Shinichi Uchida said the bank will not raise interest rates when markets are unstable – comments that come after volatile moves in the Japanese currency.
However, the yen remained well above the 38-year lows hit this year, with the pair falling sharply over the past four weeks from a high of around 162 yen hit last month.
The yen’s weakness was largely due to record low interest rates in Japan, which boosted the once popular yen carry trade.
This trade involved borrowing yen and then using it to buy currencies with better returns. As a result, the yen became the preferred currency for financing trades in US dollars, Mexican pesos, New Zealand dollars, and some other currencies.
But the viability of this trade came into question when Japanese authorities began intervening to support their beleaguered currency, before it began to collapse properly when the Bank of Japan raised interest rates last week.
Japan’s overnight interest rate is only 0.25% while the dollar rate is around 5.5%, but carry trades are more sensitive to currency movements and price expectations than to the actual level of prices.
“The interest rate differential and the risk-reward balance of the yen trade have not yet met the conditions that prevailed in the past when USD/JPY entered a downtrend,” analysts at Citi Research said in a note dated August 7.
“However, the Japanese government’s yen buying intervention since 2022 has caused a change in fundamental supply and demand and may have accelerated the USD/JPY peak. In this case, the pair may not return to last month’s highs, but instead may be vulnerable to an increasing downside range over time.”
The bank expects the USD/JPY pair to fall below 140 yen in 2025, 130 yen in 2026, and 120 yen in 2027.
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