USD/JPY has climbed to a fresh year to date high of 137.28. USD/JPY may remain elevated over the near term, but it is prone to downside risks amid stretched valuation, in the view of economists at HSBC.

Downside beckons

“Our analysis result suggests that the JPY tends to be negatively correlated with the Organisation for Economic Co-operation and Development (OECD) area’s Composite Leading Indicators (CLI) – that is, it is an anti-cyclical currency – but the correlation coefficient is quite modest and less negative than that for the US Dollar Index (DXY). In other words, the USD tends to benefit more than the JPY when the global economy is slowing.”

“Another complication that while oil prices remain on the defensive, they remain high and problematic for a large energy importer like Japan.”

“While USD/JPY may remain at elevated levels over the near team, we think that USD/JPY is looking stretched from a valuation perspective and is prone to downside risk over the longer term.”