UBS has revised its forecast for the USD/JPY exchange rate, predicting significant fluctuations over the next year, with a possible surge to 160 before settling lower in 2025. In a note released Thursday, the bank now expects the currency pair to reach 155 by December 2024, followed by a gradual decline to 152 in March 2025, 150 in June, and 147 by September. By the end of 2025, UBS forecasts the USD/JPY to settle at 145, down from its previous predictions of 147, 143, 140, and 138.
The Swiss bank also pointed out that a near-term surge to 158-160 is still possible, especially if U.S. 10-year Treasury yields rise by another 30-40 basis points, potentially reaching 4.8%. UBS explained that historical sensitivity analysis indicates that a 10 basis point widening of the U.S.-Japan 10-year yield differential typically corresponds to a one-yen rise in the USD/JPY exchange rate. If U.S. yields do hit 4.8%, the bank predicts the currency pair could temporarily spike to 160, but it views this level as unsustainable. Such a surge would likely prompt intervention by Japanese authorities, as seen during similar peaks earlier in 2024.
Looking further ahead, UBS analysts foresee downward pressure on the USD/JPY in 2025, primarily driven by expectations of a Federal Reserve rate-cutting cycle. Lower U.S. yields, combined with trade tensions and potential policies under a Trump-led administration that could focus on a stronger yen, are expected to reinforce the downtrend. UBS believes the current levels of USD/JPY are inflated beyond what the yield differential justifies, predicting the currency pair will trend towards 145-146 in the longer term.
For investors, UBS suggests that any temporary spike toward 160 could present an opportunity to “tactically sell USD/JPY,” with the longer-term outlook favoring a decline towards 145 by the end of 2025.
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