USD/JPY Forecast: MUFG Sets 154.50-158.50 Range for Central-Bank Week

MUFG sees limits to US Dollar gains against the Japanese Yen as central-bank guidance and fragile market confidence shape a volatile week for the pair.

The US-Dollar-to-Japanese-Yen exchange rate rose to 157.47 on Monday, up 0.40%, recovering further from last week’s sharp fall as investors approached decisions from the Federal Reserve and Bank of Japan.

MUFG forecasts a 154.50-158.50 trading range for this week, with renewed market anxiety potentially favouring the Yen even if central-bank messages remain hawkish.

The bank sees difficulty extending gains beyond recent highs above 158.50, rather than an unbreakable ceiling or a longer-term exchange-rate target.

Its caution follows last week’s shift in the pair’s drivers: higher oil prices and US yields initially lifted USD/JPY, before concerns about French finances and technology shares encouraged investors to reduce risk.

Teppei Ino, MUFG’s Tokyo head of global markets research, writes: “Risk aversion spread across financial markets, with equities selling off and bonds rallying, accompanied by dollar selling and yen short-covering.”

Investors closing positions against the Yen must buy it back, giving the currency support that can outweigh the income advantage of holding Dollars.

Monday’s rebound leaves USD/JPY in the upper half of MUFG’s projected range, but still below the area where the bank expects fresh gains to become harder.

Similar central-bank messages may limit the currency response

The Fed’s 27-28 October meeting comes before the BoJ’s 29-30 October meeting, allowing the US announcement to influence the market backdrop facing Japanese policymakers.

MUFG expects both to hold rates, alongside the ECB, after all three raised borrowing costs in September.

Inflation could nevertheless keep the prospect of further tightening alive.

Ino says: “However, inflation remains a concern for all three central banks, so they are likely to maintain a hawkish policy stance and could signal another rate hike in December.”

“If their policy messages remain broadly aligned, the central bank meetings themselves may not generate a significant move in FX markets.”

A hawkish statement from one central bank therefore needs to be judged against what the other delivers, as well as against market expectations.

MUFG regards the Fed outcome as less certain, with stronger inflation keeping speculation about a surprise increase alive.

Against that, senior officials have expressed caution about consecutive hikes, and signs of market instability could discourage another immediate move.

The bank warns that a pause would not rule out a renewed Dollar advance: “Nevertheless, a hawkish overall tone would not be surprising, potentially including dissenting votes in favor of a rate hike or comments from Chair Warsh at the post-meeting press conference pointing to the need for further hikes.”

The BoJ vote could matter as much as a hold

MUFG expects Governor Kazuo Ueda to signal a shift in the inflation assessment: “However, the updated Outlook Report is likely to effectively declare that underlying inflation has reached the BOJ’s 2% price stability target.”

“The normalization of monetary policy pursued since Governor Kazuo Ueda took office could therefore be entering a new phase.”

The September increase to 1.25% passed by seven votes to two, showing that the board was already divided over tightening.

Ino writes: “One risk would be if the two Board members who opposed the September rate hike were to dissent against a hold this time and instead call for a rate cut.”

That is a possible voting outcome, not a prediction that the BoJ will cut rates this week.

Ino warns: “If the BOJ’s reflationist members were nevertheless to call for a rate cut, it would reinforce the Bank’s dovish image and likely prompt yen selling.”

The case for Yen gains without an aggressive Japanese hiking cycle featured in Mizuho’s earlier analysis of US yields.

Writing after last week’s sell-off, Ino argued: “Even if the BOJ meeting triggers yen selling, many market participants would be taking on fresh risk by joining the move. The prevailing risk-off mood in financial markets is likely to deter them from doing so.”

“Renewed yen selling would likely prompt further warnings from the Japanese authorities as well. Fresh yen shorts offer little reward for the exposure involved.”

What This Means for USD/JPY

A Fed message that strengthens expectations of further US hikes, combined with unexpectedly dovish BoJ dissent, would challenge the bank’s view that gains above 158.50 will be difficult to sustain.

For the Yen, renewed selling of riskier assets could matter even without a Japanese rate increase. Last week’s combination of bond buying and the closing of positions against the currency provides MUFG’s basis for watching further deterioration in sentiment as a potential source of Yen demand.

A stable market backdrop and broadly similar guidance from the two central banks would offer less reason for a decisive move. The 154.50-158.50 range describes MUFG’s assessment of that event risk this week, with the direction dependent on both policy surprises and investors’ willingness to keep taking risk.