Investing.com — The dollar has dominated the yen this year as the Federal Reserve and Bank of Japan implement opposing monetary policy measures, and now the risk is growing for the to overshoot before an expected correction in the first quarter of next year, strategists from BofA said in a recent note.
“We are structurally bullish on USD/JPY but have expected a correction in 1Q25 on increased US policy uncertainties,” BofA noted, though flagged the risk of the USD/JPY overshooting as bets on a Bank of Japan, or BoJ, rate hike fade.
USD/JPY rose above 153 last week as the market priced out expectations for a BoJ rate hike at its December meeting, the strategist said.
This pricing dropped from over 60% at the end of November to just 16% as of now, following media reports suggesting that the BoJ is inclined to hold rates unchanged due to uncertainties around US economic policy and wage trends.
Falling odds of a BoJ rate hike increases the risk of USD/JPY overshooting, potentially triggering foreign exchange intervention by Japan’s Ministry of Finance before the BoJ’s January monetary policy meeting. the strategists said.
If USD/JPY trades close to 155 before the BoJ’s December meeting, the lack of a rate hike could impact market perceptions regarding Japan’s currency policy. “The FX market would interpret recent media reports as the BoJ being fine with USD/JPY somewhere below 155,” they added.
In the lead up to the BoJ December meeting on
Dec. 18-19, BofA strategist expect that if USD/JPY rallies after the meeting, intervention risks may be limited due to thin liquidity conditions typical of year-end trading.
