SocGen: We expect USD/JPY to drop into the 130s in the first half of 2025

SocGen expects USD/JPY to experience at least a temporary dip into the 130s in the first half of 2025 due to shifting yield dynamics, despite the pair currently trading near 152.

Key Points:

1. Yield Differential as Key Driver:

   • USD/JPY has closely tracked relative long-term yields, with an unusually strong correlation in recent years.
   • The rise in longer-dated Japanese Government Bond (JGB) yields, now holding above 1%, reduces the need for a US yield surge to drive USD/JPY higher.

2. Investor Behavior:

   • Japanese investors have alternated between buying and selling foreign bonds, reflecting shifting appetite based on yield spreads.
   • As yield differentials stabilize, foreign asset demand could weaken, limiting upward momentum for USD/JPY.

3. Market Sentiment Shift:

   • Any steepening in the US yield curve would be required to push USD/JPY back near its highs.
   • With structural shifts in JGB yields, SocGen sees a strong likelihood of USD/JPY retreating into the 130s temporarily in 1H25.

Conclusion:

SocGen believes that with higher JGB yields and stable yield differentials, USD/JPY is set for a potential dip into the 130s in the first half of 2025, despite its current elevated trading level near 152.

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This article was written by Adam Button at www.forexlive.com.