Here is why USD/JPY will struggle to climb higher from here – MUFG

MUFG Research discusses USD/JPY outlook and sees a limited scope for the pair to trend higher in the near-term.

“The swing in July was certainly extreme and unlikely to be replicated but it does highlight one of the fundamental factors limiting the scope for the yen to depreciate on any kind of a sustained basis at levels over 110.00. At the lower bound with investors holding little confidence in the BoJ’s ability to lift inflation, real yields are likely to remain relatively attractive,” MUFG notes. 

“Add to this a structurally stable current account surplus over 3% of GDP and a currency that on many metrics is about 10% undervalued,
the prospect of USD/JPY trending higher from here looks limited. Yes, a
rebound in US nominal yields can play a role in lifting USD/JPY as
correlations show but the correlations weaken at higher levels over
110.00 and over a medium term timeframe, valuation, external positions
and real yields suggest downside risks,” MUFG adds.

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