We have long stressed that diminished US exceptionalism represents a meaningful risk to our stronger Dollar view, and the path for the Yen in particular. When markets are most concerned about US growth, pushing both yields and equities lower, the Yen tends to outperform even the Dollar.
And the growing downside risks to the US economic outlook— particularly via higher policy uncertainty—strengthens the case to add long Yen positions to pro-risk portfolios.
Taken together, we think the range for USD/JPY has shifted lower with more limited scope for upside as long as policy uncertainty remains elevated. Therefore, we are revising down our forecast path to 150, 151, 152 (vs. 152, 154, 156 previously).
We continue to show an upward sloping path for a couple of reasons. First, our current forecasts imply relatively stable rate differentials, even with the assumption of a couple Fed cuts and another BoJ hike this year. The scope for BoJ tightening also looks likely to be limited to some extent by any further Yen appreciation (though incoming data from the Shunto wage negotiations have so far justified additional hikes).
Moreover, if US growth does turn out more benign than feared as our economists currently expect, we should see renewed equity upside that then weakens the case for Yen longs. That’s especially relevant as shorter-term investors are heavily positioned that way, leaving scope for more meaningful reversal on any relaxation.
But given that it will likely take some time (i.e., better incoming US data or a shift in policy messaging by the administration) for investors to become less worried about the growth trajectory, we think the momentum is hard to fight. For that reason, we prefer leaning into short AUD/JPY as equities look to have a somewhat high bar for meaningful reversal, and long JPY paired with a riskier currency tends to produce the best returns in that backdrop (Exhibit 4).
We prefer AUD over CAD given its lower vulnerability to better-than-expected news on tariffs, but they are otherwise similar expressions. We recommend going short AUD/JPY with a target of 90.5 and a stop of 97.
