The Japanese Yen (JPY) is currently the worst performer against the US Dollar (USD) at -6% year-to-date, making it the stand-out funding currency. Despite this, economists at ING believe that the JPY is close to 15% under-valued based on their medium-term fair value models. However, the Yen is being weighed down by the low volatility and carry-friendly environment, which is expected to persist in the near future.
The ING economists suggest that a substantial decline in the USD/JPY exchange rate may require a broader trend reversal in the US Dollar, something they anticipate happening in the late second quarter. They also believe that if the USD/JPY reaches the 155.00/160.00 area before this turnaround, it would be a good opportunity for corporates to consider increasing their hedging plans for USD receivables and JPY payables. Overall, the current outlook for USD/JPY remains bearish, but there is potential for a shift in the medium-term if the broader Dollar trend reverses as predicted.
In summary, the Japanese Yen is currently the weakest currency against the US Dollar, but ING economists believe it is undervalued and predict a potential turnaround in the USD/JPY exchange rate later in the second quarter. The Yen’s weakness is attributed to the low volatility and carry-friendly environment, which is expected to persist for the time being. If the USD/JPY reaches a certain level before the anticipated Dollar trend reversal, it could present an opportunity for corporates to adjust their hedging plans.
