Key takeaways

• USD-JPY has rebounded with the market’s hawkish repricing of the Fed, fuelled by the US election results.
• With high uncertainty on the US’s policy priorities and timeframes, a strong USD should weigh on the JPY.
• But a significant overshoot of USD-JPY from fundamentals will be met with FX intervention and a possible BoJ rate hike.

The JPY has weakened c8% against the USD quarter-to-date because of the market’s hawkish reassessment of the Federal Reserve’s (Fed) policy rate trajectory, on the back of positive US data surprises and potential policies that the new Trump administration may implement. The futures market pricing of a year-end 2025 Fed rate is now at c3.8%, c80bp higher than its end-September pricing of c3% (Bloomberg, 14 November 2024).

Admittedly, there is limited information at this juncture on the incoming US administration’s policy priorities and timeframes. But amid high uncertainty, the USD should have an upper hand over the JPY, given the former’s much higher yields and more robust growth. Japan’s basic balance (a combination of current account balance, net foreign direct investment and net portfolio flows) is still in deficit, weighing on the JPY ordinarily.

Source: Commodity Futures Trading Commission, Bloomberg, HSBC

Source: Bloomberg, HSBC

Additionally, the JPY faces headwinds from the possibility of the return of JPYfunded carry trades (i.e., selling the JPY to fund the purchase of higher-yielding currencies or assets), as speculative market has started turning short JPY again since late October and the current positioning is still far from extreme levels seen in 2Q (Chart 1). It is also worth monitoring that USD-JPY seems to have already risen faster than its yield differential recently (Chart 2). But if we do get to that point of divergence from fundamentals, we think a significant overshooting of USD-JPY will be met with FX intervention again, and potentially, a rate hike by the Bank of Japan (BoJ) too – similar to what happened in July.

All things considered, we now see USD-JPY rising further over the coming quarters, before stalling at around the multi-decade highs (last reached in the beginning of July).

https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-11-18/