JPY Underperformance Favors Yen Against USD Amid Rate Spread Outlook Shift
The Japanese Yen has been underperforming against major currencies and USD/JPY. According to Brown Brothers Harriman, this is largely due to firmer oil prices supporting the US Dollar. However, the firm's Elias Haddad notes that the rate spread outlook favors JPY over the coming months.
Haddad highlights that US-Japan interest rate differentials could narrow further in favor of a lower USD/JPY. The Bank of Japan's (BoJ) policy rate is near the lower end of its neutral range estimate, while Japan's economy operates above potential. In contrast, Fed policy is restrictive and the economy is operating around potential.
The BoJ's latest meeting minutes did little to shift rate expectations, but Haddad notes that risks are skewed towards a hawkish BoJ repricing and a dovish Fed repricing. This could lead to a narrowing of US-Japan interest rate differentials in favor of JPY.