USD/JPY likely to decline towards 108 by end-2017 and 105 by end-2018 – Lloyds Bank

Over the past month, the Japanese yen has been the worst-performing developed market currency. It dropped more than 3 percent against the U.S. dollar. The weakness has occurred against a backdrop of increased geopolitical tension, with North Korea firing and intercontinental ballistic missile into the Sea of Japan, noted Lloyds Bank in a research report.

The recent decisions by the Bank of Japan have also impacted. During its June meeting, the U.S. Fed hiked the Fed funds rate by another 25 basis points. The FOMC is expected to further hike rates again and embark on a balance sheet reduction program by the end of this year, stated Lloyds Bank.

On the contrary, during its last meeting, the Bank of Japan kept its policy rates on hold. Moreover, it subsequently reaffirmed its offer to purchase an unlimited amount of bonds, reiterating a staunch commitment to its yield curve control strategy. Furthermore, Japanese economic data have deteriorated.

The jobless rate rose to 3.1 percent, while inflation undershot expectations in May, underlining the problem the central bank has in reaching its 2 percent target. However, ‘fair value’ analysis of the pair implies that the USD/JPY pair is fundamentally undervalued. The pair is expected to decline towards 108 by the end of this year and to 105 by the end of 2018, added Lloyds Bank.