Citi says the yen could gain upward momentum if Japanese equities correct further. The firm's base case does not call for a bearish trend in Japanese stocks. It also expects Japan to step in if U.S. and Japanese equities recover and USD/JPY reaches around ¥160.
Citi attributes the yen's first-half depreciation mainly to historical gains in Japanese equities and expanded yen-sale hedging by investors, according to a research note. The causal relationships between stocks and the currency are complex, the firm says.
Yet the pattern is not unique to Japan. Citi says a similar tendency for the currency to weaken when equities are strong is broadly evident in other Asian markets, with South Korea a typical example.
Looking ahead, Citi does not expect Japanese equities to enter a bearish trend in its base-case scenario. However, the firm notes a risk scenario in which the yen could gain upward momentum if equities correct further.
If U.S. and Japanese equities recover and USD/JPY reaches around ¥160/$, Citi expects the Japanese government to carry out currency intervention and buy the yen again.
Source: Investing.com
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