UBS sees a potential shift in the currency pair's trajectory.
Analysts at UBS suggest that the Japanese yen, which has been suffering significant weakness, may be on its way to reversing.
These expectations are based on the growing concerns of Japanese policymakers and companies about the negative effects of the decline in the value of the yen on the country's economy.
The report cites a recent survey of local small and medium-sized businesses, which are a major employment sector in Japan, employing about 70% of the workforce. The survey results showed that 35% of participants experienced negative impacts on sales due to the weak yen, and 63.9% reported negative impacts on profits.
Furthermore, half of the companies surveyed expressed that the “right level” for USDJPY would be between 110 and 120, in contrast to the higher levels the currency pair has seen recently.
UBS points to the upcoming Bank of Japan meeting on June 14 as a crucial event that could influence the yen's direction. The company interprets the Bank of Japan's tolerance of rising 10-year Japanese government bond yields, which have reached an eleven-year peak of 1%, as a sign of a possible hawkish shift in policy.
UBS expects Bank of Japan Governor Ueda to signal readiness to begin an interest rate hike cycle, with interest rate increases expected from 0-0.1% to 0.25% in July, possibly followed by two additional 25 basis point increases in 2025.
Given the possibility of a tougher Bank of Japan stance, signs of a slowdown in US jobs and inflation data, UBS is maintaining a bearish path for USD/JPY.
They believe that the pair is likely to reach a peak at the 160 level, with a decline expected in the medium term.
The report identifies potential limits for the USD/JPY pair, suggesting that a rise to 157.5-160 may trigger foreign exchange market intervention, while a fall to 150-152 may attract demand for yield-bearing trades.
However, UBS also notes that if US economic data does not show signs of moderation, USD/JPY may remain at its elevated levels.
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