Japanese Yen: Intervention risks and Fed path – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses USD/JPY ahead of the US July Consumer Price Index release, predicting softer US inflation could weaken the Dollar and lower the odds of breaking above 160. Foley forecasts a 3-month USD/JPY level of 158, assuming support for the Japanese Yen. If July's US CPI inflation data is softer than expected, the USD may weaken, reducing the chance of another breach of 160.

Stronger than expected US CPI data and a stronger USD would be unfavorable for the Japanese government, as it would support the carry trade and increase the risk of another attempt to reach 160. Rabobank's 3-month forecast of USD/JPY 158 assumes a number of factors align to provide support for the JPY. The central view of Rabobank is that the Fed will maintain steady rates this year.

A re-pricing towards this view could soften the USD. A favorable shift in short-term interest rate differentials for the JPY could offset the carry trade and lessen the risk of a breach of USD/JPY 160. However, the government may need to exert more effort to address fiscal discipline concerns and reassure investors to calm the JPY.