USD/JPY: Yen depreciation to extend further over short-term – MUFG

Economists at MUFG Bank see a number of factors that may extend further the spell of JPY weakness over the short-term. 

On Tuesday, the USD/JPY pair looks to build on bullish momentum beyond the 105.00 mark.

Key quotes

“The trendline resistance from the post-COVID-19 recovery intraday high in March and the highs in June and earlier this month was broken fuelling a liquidation of short-term short USD/JPY positions. IMM data does not suggest very large leveraged positions but nonetheless, the market is short and these positions are now being cut. 

“The fears over the economic outlook in Japan are easing with implications for inflation expectations and hence the monetary stance (in real terms). COVID-19 infections are falling with the state of emergencies having an impact. The 7-day average of daily infections has declined nearly 30% in a week. That will reduce fears over the hit to the economy in Q1. Inflation expectations have turned higher this month.”

“With the BoJ Monetary Policy Review to be completed in March, there is a higher degree of uncertainty over the near-term outlook for monetary policy which may be curtailing yen demand. We doubt there will be anything meaningful announced but uncertainty ahead of the conclusion of the review will persist.”