Substantial rally in yen unlikely – Capital Economics

Investing.com – The Japanese yen has been on the rise of late, boosted by the dip in US Treasury yields, and Capital Economics expects it to rally additional in 2025.

At 10:20 ET (15:20 GMT), USD/JPY fell 0.4% to ¥155.74, buying and selling not distant from its weakest degree since Dec. 19.  

“One of many key beneficiaries of the dip in US Treasury yields because the December US CPI print has been the yen,” mentioned analysts at Capital Economics, in a observe dated Jan. 16.

“That’s maybe not stunning – the rise in Treasury yields, which had far outpaced that of JGB yields, had been a key driver of the latest strain on that foreign money.”

Some hawkish feedback by Financial institution of Japan officers, together with Governor Ueda and Deputy Governor Himino, in addition to media leaks seemingly confirming that the central financial institution will hike subsequent Friday, have in all probability helped the yen too.

The Japanese foreign money continues to be very weak towards the greenback, however with US Treasury yields maybe turning round a nook, may we be at the beginning of a renewed yen rally?

Capital Economics has doubts.

“We suspect that vast good points, comparable to these we noticed in mid-2204, aren’t on the playing cards this time round,” Capital Economics mentioned, including that two of the important thing elements that fuelled that rally don’t appear to be current now.

For one, though the group thinks Treasury yields will fall, it doesn’t anticipate them to fall significantly far.

“The Fed appears to be virtually finished with its easing cycle: we expect it’s going to lower by one other 50 bps, of which 40 bps appears already priced in. That, by itself, in all probability wouldn’t give the yen an enormous increase,” Capital Economics mentioned.

What’s extra, though positioning isn’t as stretched, the broader valuation of the yen continues to be fairly low. The true efficient change fee, for instance, continues to be fairly weak compared with its previous. 

However, Capital Economics wouldn’t rule out a rally utterly. For a begin, the group nonetheless thinks the Financial institution of Japan may spring a hawkish shock.

“All that means to us that additional good points are on the playing cards for yen, even when they could appear tepid in comparison with these it noticed in mid-2024. Our end-year goal for the foreign money is ¥145.”