Crédit Agricole's scenario analysis points to a higher US Dollar against the Yen, with a median outcome of 170.45. The bank argues that structural weaknesses in the Yen leave USD/JPY biased upward, and that Japanese intervention near current levels would be fighting the fundamentals.
Crédit Agricole sees the US Dollar to Yen exchange rate climbing further, with the median outcome from its scenario analysis at 170.45. USD/JPY is trading around 161.70 after a July high above 162.80, which leaves the Japanese currency close to multi-decade lows.
Intervention would fight the fundamentals
The bank's model puts short-term fair value near 161.75, which suggests that intervention by Japanese authorities around present levels would run against the fundamentals. According to Crédit Agricole, the path for USD/JPY stays higher unless the currency's structural problems are addressed: "the path for USD/JPY is higher unless the structural weaknesses in the JPY are addressed." Those weaknesses include loose monetary policy, a steepening Japanese government bond curve and the continued investment of Japan's current-account surpluses into overseas assets.
Scenarios from a peace deal to a fiscal shock
To reach its estimates, the bank tested a range of scenarios covering Federal Reserve and Bank of Japan policy, Japan's fiscal outlook and the future of the US-Iran conflict. Even its more favourable case for the Yen — both central banks on hold, a peace settlement and easing fiscal concerns — produces a fair-value estimate near 163.50.
The downside for the Yen runs deeper. A renewed closure of the Strait of Hormuz could push fair value towards 171, as higher energy prices would potentially force the Fed to raise rates while encouraging the BoJ to stay cautious over the threat to Japanese growth. The most severe fiscal scenario places USD/JPY near 174.60, reflecting fears over Japan's debt position and concerns that the BoJ is falling behind the inflation curve.
A battleground above 162
Crédit Agricole describes the 162-164 region as a key battleground for Japanese authorities. A sustained move above this zone would take USD/JPY beyond its post-Plaza Accord trading range and could increase pressure for another round of intervention. Traders following how to trade USD/JPY will be watching that zone.
Source: Exchange Rates UK
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