FX Daily: Fight the yen at your own risk
The desk expresses caution regarding the recent strength of the Japanese yen, suggesting that the ongoing rally is heavily reliant on optimistic expectations of tightening by the Bank of Japan (BoJ) and potential asset allocation changes by the Government Pension Investment Fund (GPIF). Per the full note from ING, the current momentum may be unsustainable, particularly as USD/JPY has just breached key technical levels due to low market liquidity around the US holiday, highlighting the need for traders to be mindful of volatility. With broader USD sentiment still fluctuating, the potential upside for the dollar remains despite its current weakening, as evidenced by ongoing strength in US payroll figures and high energy prices. This context adds urgency for traders to tread carefully before attempting to capitalize on a dip in USD/JPY.
What the desk is arguing
The desk is cautioning against betting against the yen’s recent rally, as it appears fundamentally supported but may lack sustainability. Recent moves in USD/JPY through critical support at 155.0 down to 153.0 underscore the volatility influenced by market conditions, particularly thin trading volumes due to US holidays, as indicated by the source commentary.
The current technical landscape suggests further potential downside targeting 152.0, a level where previous rallies encountered resistance. A breakdown below this could pave the way to 150.0. Although the sell-off has been exaggerated by liquidity conditions, standing against the yen's momentum poses significant risks given current market sentiment dynamics and speculative carry trade unwinding.
Where it sits in our coverage
Our consensus target for USD/JPY stands at 152.0, with a range spanning from 149.0 to 161.7145. Notable per-firm targets for December 2026 include: - morganstanley: 140.0000 - rbc: 147.0000 - ing: 152.0000
This positioning is generally in line with the broader market outlook, reflecting a median expectation of the yen remaining resilient, yet notes from firms like tmgm listing a much higher target of 163.0000 indicate a variance in bullish sentiment within certain corners of the market.
How other firms see it
Broad sentiment appears aligned amongst firms predicting a continued yen strength, with rbc and ing targeting levels similar to our desk. Conversely, firms such as morganstanley espouse a more bearish outlook, projecting substantial declines towards the 140.0000 range by December 2026.
This dynamic underscores the interrelated nature of USD/JPY with the broader narratives surrounding the ECB’s stance on interest rates and fiscal policy amid ongoing global economic pressures. Insights from the Eurozone's rate path could serve as a vital intersect as traders look for cues on currency correlations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Caution against betting against the yen amid its recent rally, which may not be sustainable.
- 02Recent volatility in USD/JPY driven by low liquidity and technical breakdowns at key levels.
- 03Potential downside targets around 152.0 could trigger further selling pressure on the yen.
- 04Broader USD sentiment remains volatile, with strength in payrolls and energy prices complicating forecasts.
Market implications
Traders should monitor USD/JPY closely as it approaches critical support around 152.0, which if breached could initiate further downside pressure towards the 150.0 level. Attention to US economic indicators, particularly the upcoming CPI data, may add context to the dollar's potential recovery or continued decline.
Risks to this view
Failure to sustain above the 152.0 support level can trigger a sharper decline, particularly if the Fed's upcoming rate decisions bring new strength to the dollar. Additionally, any substantial changes in the BoJ's monetary policy could dramatically alter the yen's trajectory and risk profile.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Articles FX Daily: Fight the yen at your own risk Published 07:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The yen’s hectic rally is relying on quite optimistic bets on tightening and GPIF changes, and was probably exacerbated by thin liquidity around the US holiday. We have our doubts that it can be sustainable beyond the near term, but for now, it still looks too risky to catch the falling USD/JPY. The broader USD sentiment remains affected, but has room to improve Francesco Pesole , Frantisek Taborsky and Chris Turner The yen can still extend its rally in the near term We have published the September edition of FX Talking: Don’t call it a dollar comeback with our latest FX views and forecasts.
USD: USD/JPY story dominates Yen moves have continued to dominate the start of the week. Thin liquidity due to the US holiday likely amplified yesterday’s USD/JPY sell-off, pushing the pair through the key 155.0 level before extending to 153.0 overnight. This still looks primarily like a JPY story rather than evidence of a broader shift in sentiment towards the dollar.
Fast money appears increasingly focused on a combination of a hawkish Bank of Japan and GPIF increasing domestic ownership. Despite short-term fundamentals suggesting the move is overdone, it remains risky to stand in its way, particularly given the scope for further carry trade unwinding. The next meaningful support only comes in at 152.0, where the yen rally stalled in January and February.
A break below that could quickly open the way towards 150.0. Whether such a move would prove sustainable if the Fed hikes next week remains an open question, but current volatility argues against trying to catch the falling knife. The yen rally continues to spill over into broader dollar weakness, even as the wider USD narrative remains unresolved.
Strong payrolls and elevated energy prices (Brent close to $100/bl) remain supportive, yet markets are still only pricing around 15bp of tightening for September and risk sentiment has held up well. US equity futures point to a softer reopening today, which could lend the dollar some support against an otherwise empty calendar. We continue to think the bullish case for the dollar will prove stronger in the near term, although Friday’s US CPI release remains a clear risk event.
Francesco Pesole EUR: Downside risks remain Second-quarter eurozone growth was revised up from 0.4% to 0.6% QoQ, driven by stronger Irish growth on the back of robust multinational performance. More broadly, Europe’s resilience despite geopolitical developments and higher commodity prices remains a key theme of the summer and has likely helped keep the euro relatively expensive. Our short-term downside preference in EUR/USD is still mainly driven by our USD view and expectation of a September Fed hike.
Sources & References
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