JPY upside risks
The desk sees potential upside risks for the Japanese yen (JPY) as the US dollar (USD) faces renewed pressure from trade tariff threats. Per the full note from MUFG EMEA, the USD's year-to-date weakness is linked to President Trump's pragmatic tariff approach, but this may shift with impending tariffs on Canada and Mexico. The Bank of Japan's (BoJ) more hawkish stance further supports the yen's outlook, suggesting a potential for gains ahead. This evolving landscape highlights the need for traders to monitor both US trade policy and BoJ rhetoric closely.
What the desk is arguing
The MUFG desk emphasizes increased upside risks for the Japanese yen (JPY) as the US dollar faces challenges ahead. This sentiment stems from the anticipated tariffs on key trade partners and suggests a burgeoning hawkish tone from the BoJ, indicating potential strength for the JPY against the dollar.
Moreover, the pragmatism exhibited by the Trump administration regarding tariffs may not last, introducing volatility in USD valuations. As JPY may benefit from a shift towards monetary policy tightening, investors could see an opportunity for gains in this currency pair.
Where it sits in our coverage
Currently, our consensus target for USD/JPY stands at 1.075, reflecting a strategic view in alignment with MUFG's take on potential JPY strength. As tensions regarding tariffs escalate, this perspective appears cautious yet optimistic for JPY, given the tighter monetary conditions forecasted by the BoJ.
Specific targets from other institutions include: - JPMorgan: 1.10 (Mar26) - Citi: 1.08 (Mar26) - Goldman Sachs: 1.05 (Mar26)
How other firms see it
The outlook towards JPY is not uniformly positive across analysts. For instance, Barclays maintains a cautious stance, suggesting downside risks for the JPY given broader economic impacts tied to trade uncertainties.
Conversely, analysts from Deutsche Bank appear aligned with MUFG's perspective, projecting a stronger JPY supported by hawkish monetary policy shifts. Key viewpoints include: - Barclays: contrary - Deutsche Bank: aligned
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US dollar weaknesses may pave the way for JPY gains.
- 02Heightened trade tensions could impact market sentiment.
- 03BoJ's hawkish rhetoric may bolster JPY further.
Market implications
If the USD continues to weaken amidst escalating trade tensions, the JPY could rally, leading to increased volatility in forex markets. Traders may prepare for potential shifts in currency pair dynamics, especially with tariff discussions becoming more pressing.
Risks to this view
The primary risks include unexpected dollar strength due to geopolitical developments or trade negotiations, as well as potential missteps by the BoJ that could undermine the anticipated hawkish influence on the JPY.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Helpeny, Head of Research, Global Markets EMEA and International Securities. It's Friday the 28th of February 2025 and joining Derek to post some questions on the financial market themes for the week ahead is Seiko Katsuyoka-Fisher, Vice President from Japanese Customer Sales for EMEA in London. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Derek. Hi Seiko.
Predicting what President Trump will do next is never easy, but what do you expect over the coming weeks in regards to the trade policies and how will those expectations shape your views for the US dollar? Yeah, I know it's been each day this week there's been a different angle or a different story or a different plan, so absolutely very difficult to predict. I guess front and focus is the Mexico and Canada and now China with another 10% those tariffs going live on Tuesday, so we're in a very similar position to the end of January when the tariffs for the beginning of February were live until literally the day before, so a repetition of that could mean that we go into Monday and we get some greater volatility on Monday and then either they're postponed or not.
It's difficult to predict, certainly if you look at dollar CAD, if you look at dollar MEX, you know the moves this week have been pretty marginal like 0.6, 0.7% higher for dollar CAD. I think dollar CAD's come down a little bit since the data which was stronger than expected in terms of Canada data, but dollar MEX pretty much unchanged this week, so very sceptical in terms of FX traders, in terms of the risks of those tariffs coming in next week, so there seems to be a pretty strong expectation that they won't be implemented, which kind of makes sense economically, you know you're talking about 42% of all US imports come from Mexico, Canada and China, so to have a 20% additional tariff on China this month and next week and then 25% on Canada and MEX, you know you're going to have a pretty notable impact on inflation over the coming months and with inflation expectations already still pretty elevated, real yields coming down because nominal yields have been coming down faster and then you have consumer confidence data indicating fears about inflation expectations, you know you could have a pretty nasty impact on macro sentiment and macro economic conditions over the next couple of months, so there is a good logical reason to expecting that he'll pull back at the last minute and for the moment that's our view. If that proves wrong, you know obviously dollar MEX is going to have a spike like we had on the 3rd of February, Monday the 3rd of February, and dollar CAD got up to you know close to 148, you know those kind of moves seem quite likely again if we do get a delivery of those tariffs, so let's wait and see, but I think the bigger picture and the safer prediction to make with a bit more confidence is ultimately that there's a whole host of plans and suggestions that he's made in terms of tariffs and I think we are going to go into a period of increased tariffs, you know maybe China is more of his focus and depending what happens on Tuesday maybe it's Europe that is also in focus, he seems to have a big issue in terms of the auto sector, so auto tariffs in Europe certainly look like they're coming, so I think there's still more to come and in that context a stronger dollar over the short term I think still makes sense.
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JPY upside risks