USD/JPY continues to fluctuate wildly. The Japanese yen is enjoying a relief rally but the broader outlook suggests the JPY is unlikely to rebound significantly at this point, economists at Scotiabank report.

JPY may correct but challenges remain

“Nominal yield differentials are a powerful source of support for the USD at the moment. Wide yield spreads also make the JPY an expensive long (and an attractive funding currency). Commodity prices are liable to remain elevated, weakening Japanese terms of trade. As a consequence of rising import costs, Japan’s external accounts position has weakened in recent months which has served to undermine its safe-haven position.”

“Market positioning has perhaps become too bearish and is due a correction. Seasonal trends typically turn a little more bearish for USD/JPY from this point of the year.”

“A push back under 120 may be possible in the next 2-4 weeks but we think the risk of the Fed lifting rates 50bps at the May 4th FOMC (and perhaps signaling that the pace of tightening is picking up over the next few meetings) will limit scope for USD losses and keep USD/JPY well-supported in the 118-120 zone.”