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USD/JPY to go on edging higher towards 116.00


10 December 2021

Economists at Societe Generale outline the impact of the base-case economic outlook (conviction level of 50%), the upside scenario (25%) and the downside scenario (25%) for the USD/JPY pair. The base case would see USD/JPY at 116, the upside scenario sees the USD/JPY at 118 while the pair would reach 110 in the downside scenario. USD/JPY at 116. We still expect US yields to rise along the length of the curve in 1H22, and we don’t expect much relief from pricey oil.

In real terms, the yen is back at mid-1980s levels, which seems crazy, but the commodity price surge has had a big impact on the terms of trade, the growth outlook is not that bright, and being the world’s biggest international investor doesn’t help when the major deficit nations face an excess of global savings. USD/JPY seems likely, therefore, to go on edging higher for now.

Upside scenario for 2Q22 (25% probability)

“USD/JPY at 118. The biggest potential upside risk for USD/JPY is that with COVID-19 contained thanks to continued progress on vaccination and vaccine/drug availability, global re-opening delivers an earlier-than-expected push higher in oil prices and US bond yields. Even without that, higher US yields, and increased confidence in Fed tightening, can trigger further upside in USD/JPY.” 

Downside scenario 2Q22: (25% probability)

USD/JPY at 110. A downside scenario would trigger a Fed policy rethink and, potentially, bigger downward revisions for global growth and hence resource prices. Both would lower USD/JPY, dragging it back into the 108-112 range where it was between March and September, consistent with a 20bp fall in 5y rates and/or Brent crude settling back into a $65-75/bbl range.

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