Societe Generale analysts report that USD/JPY has rebounded after defending a multi-month ascending trend line around 155.50/155.00 and is now challenging the April high. The pair is currently supported at 159.20, with projections for further gains towards 161.20 and the 2024 peak at 162 [1]. The analysts highlight that the widening 2-year UST/JGB spread, which accelerated above 270 basis points after the Non-Farm Payrolls (NFP) report, is a key factor keeping USD/JPY on an upward trajectory, despite the potential for Bank of Japan (BoJ) tightening [1].
Societe Generale notes that spot USD/JPY is trading above 160, with the 2-year UST/JGB spread reaching 277 basis points. They emphasize that while a brief pullback cannot be ruled out, the last week’s low around 159.20 serves as the first layer of support, and defense of this level may lead to persistence in the uptrend [1].
The analysts also mention that the BoJ is likely to raise rates by 25 basis points to 1.0% next week, which is at the lower end of the neutral range. However, they caution that the BoJ faces a challenging currency battle, especially if the market expects higher Fed funds rates. The central bank and Ministry of Finance (MoF) may need to follow up verbal intervention with action, but recent dollar sales have shown limited effectiveness [1].
Additionally, pension fund proxies bought a record ¥3.16 trillion ($19.7 billion) in foreign bonds in May, and Japan's first quarter GDP was revised down to 1.8% annualized [1].
CONCLUSION
Societe Generale sees USD/JPY maintaining its upward momentum, driven by a widening UST/JGB yield spread and strong foreign bond purchases. While a BoJ rate hike is anticipated, analysts believe it is unlikely to cap the rally unless accompanied by more decisive intervention. The market remains focused on yield differentials and the potential for further gains in USD/JPY.