December 12, 2024 at 07:58PM
SocGen expects USD/JPY to experience at least a temporary dip into the 130s in the first half of 2025 due to shifting yield dynamics, despite the pair currently trading near 152.
Key Points:
Yield Differential as Key Driver:
USD/JPY has closely tracked relative long-term yields, with an unusually strong correlation in recent years.
The rise in longer-dated Japanese Government Bond (JGB) yields, now holding above 1%, reduces the need for a US yield surge to drive USD/JPY higher.
Investor Behavior:
Japanese investors have alternated between buying and selling foreign bonds, reflecting shifting appetite based on yield spreads.
As yield differentials stabilize, foreign asset demand could weaken, limiting upward momentum for USD/JPY.
Market Sentiment Shift:
Any steepening in the US yield curve would be required to push USD/JPY back near its highs.
With structural shifts in JGB yields, SocGen sees a strong likelihood of USD/JPY retreating into the 130s temporarily in 1H25.
Conclusion:
SocGen believes that with higher JGB yields and stable yield differentials, USD/JPY is set for a potential dip into the 130s in the first half of 2025, despite its current elevated trading level near 152.
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This article was written by Adam Button at www.forexlive.com.