Japanese Bank Eyes 125 to 130 Range for USD/JPY and 2016 Levels for GBP/JPY

• -USD/JPY set to rise in ”orderly, higher usd trend” 
• -Scope for 125 to 130 range trade in April & May 
• -May lift GBP/JPY back to pre-referendum levels
• -GBP/JPY may rise briefly above 170 short-term

Image © Leonid Andronov, Adobe Stock

The Japanese Yen has fallen heavily amid a growing gulf between monetary policies at the Bank of Japan (BoJ) and Federal Reserve (Fed) but USD/JPY could rise further still, according to Mizuho’s FX sales desk, with possible implications for GBP/JPY.

Mizuho’s head of FX sales for financial institutions said on Tuesday that Japan's Yen is likely to fall further and that USD/JPY could reach 130 during the months ahead, which is a prospective outcome that would potentially lift GBP/JPY to 170 or more.

That would be the highest level for the Pound since before the 2016 Brexit referendum, although much also depends for GBP/JPY on the intermittent developments in the main Sterling exchange rate GBP/USD. 

“I doubt if the current uptrend is over. Look for further yen sales into April & May. My personal sense is an orderly, higher usd trend at moderate speed with steady ranges,” Mizuho’s Neil Jones, head of FX sales for financial institutions, said in a note to clients.

“The 125 to 130 road map should prove more liquid than recent price action and restrict official interest to verbal references only,” he added. 

Above: USD/JPY shown at daily intervals alongside GBP/JPY. Click image for closer inspection.

The Yen steadied against the Dollar and Pound Sterling on Tuesday in what may have been profit-taking by speculative traders following overnight remarks from Japanese Finance Minister Shunichi Suzuki, who said the government is monitoring the Yen closely.

This was after the Yen fell to multi-year lows in the opening session of the week when the BoJ said it would intervene in the Japanese government bond market with unlimited purchases in order to limit increases in government borrowing costs.

“While the comments from Japanese officials overnight are unlikely to reverse the yen weakening trend on their own, they should at least help to slow the recent fast pace of yen selling that has been evident over the last couple of weeks,” says Lee Hardman, a currency analyst at Japan’s MUFG.

Part of the BoJ’s monetary policy prescribes that the 10-year government borrowing cost be kept close to 0.10% and that it be prevented from rising above 0.25%, although enforcing this policy has become more difficult in recent weeks and in part due to Federal Reserve monetary policy.

Above: USD/JPY shown at weekly intervals with Fibonacci retracements of 2015 fall indicating likely technical resistance to a further rally. Click image for closer inspection.

The Fed lifted the Fed Funds rate for the first time since 2018 this month and markets are increasingly anticipating it will be likely to more-than reverse over the remainder of the year, the cuts that previously brought the benchmark down from 1.75% back in 2020.

U.S. inflation neared eight percent in February and could rise further still, necessitating a rapid pivot by the Fed to return its monetary policy settings to a calibration that is less stimulative of the U.S. economy and which does not add further to price pressures. 

“While the JPY is already weaker in real TWI terms than it was back in 2015, Kuroda is not verbally intervening and is maintaining the stance that a weak JPY is good for the economy,” says David Forrester, a senior FX strategist at Credit Agricole CIB. 

“Instead, Finance Minister Shunichi Suzuki is verbally intervening in the currency by saying he is scrutinising movements in FX and monitoring the negative economic effects of the JPY’s weakness,” Forrester also said on Tuesday. 

Above: GBP/JPY shown at weekly intervals with Fibonacci retracements of 2015 fall indicating likely technical resistance to a further rally. Click image for closer inspection.

The 10-year U.S. government bond yield rose to 2.5% this week while prices in other financial markets increasingly implied that the Fed Funds interest rate itself could reach that level before year-end which, when combined with BoJ policy, has driven the steep increase in USD/JPY.

This increase has, in turn, raised the Pound to Yen exchange rate sharply and would be likely to lift it further in the weeks ahead if Mizuho’s Jones is right about the Dollar-Yen pair reaching 130 some time in April or May.

GBP/JPY tends to closely reflect the relative performance of Sterling and the Yen when each is measured against the U.S. Dollar, and it would likely take a fall below 1.30 by GBP/USD in order to prevent GBP/JPY from rising above 170 in any market where USD/JPY is testing 130. 

Any move above 170 in GBP/JPY would be the strongest level for Sterling since February 2016 and some months before the infamous Brexit vote.

“If the Japanese yen is in part being punished for its reliance on commodity imports, investors should also consider the same effects on sterling, as the UK was already running semi-dire trade deficits before this last winter of spiking energy prices,” says John Hardy, head of FX strategy at Saxo Bank. 

“This GBP/JPY valuation above 160 looks very rich – not that it can’t extend further in the near term, especially if long yields continue higher,” Hardy also said on Monday.