USD/JPY likely to trend lower around 112 by end-2017, says Lloyds Bank

The Japanese yen has depreciated over 16 percent against the U.S. dollar after the election victory of Donald Trump. The JPY traded back towards 118. The renewed sharp rise in USD/JPY pair has been driven by two important forces. Firstly, the notable improvement in risk appetite occurred. Global equity markets have rallied solidly, with major U.S. indices close to record highs, noted Lloyds Bank. Secondly, the sharp increase in U.S. bond yields has also driven the currency pair higher. Since mid-November, the U.S. 10-year Treasury yields have risen by more than 90 basis points, reaching a two year high above 2.6 percent.

The correlation between the 10-year Treasury yields and USD/JPY is quite high. But the market is already discounting two additional U.S. interest rate hikes in 2017, while the prospect of additional stimulus from the Bank of Japan has receded after their strategic review of monetary policy, and thus there might be restricted scope for USD/JPY to rally much further, said Lloyds Bank. Moreover, the extent of the recent rally and reversal in JPY positioning presents downside risks.

“We look for USD/JPY to trend lower over the course of 2017, ending around 112”, added Lloyds Bank.