USD/JPY has reversed from a high near 141, largely on the back of shrinking expectations that the Fed would hike in June. That is now priced with a 25% probability rather than a 70% probability attached to it last month. We have noted that the current environment should continue to see interest in carry trade strategies – where the Japanese yen scores poorly. However, USD/JPY looks overvalued relative to the terms of trade story – which is much better for the yen than a year ago.
In addition, there is still the risk that the Bank of Japan surprises on 16 June by further normalising its Yield Curve Control policy. That would be a yen positive. And thus it would not be a surprise to see speculator investors trying to re-position short USD/JPY above 140 – even if such a strategy has already proved painful this year.
In addition, there is still the risk that the Bank of Japan surprises on 16 June by further normalising its Yield Curve Control policy. That would be a yen positive. And thus it would not be a surprise to see speculator investors trying to re-position short USD/JPY above 140 – even if such a strategy has already proved painful this year.