The Japanese yen has fallen 2.5% against the US dollar so far this year, with the bulk of the decline coming in the wake of Russia’s invasion of Ukraine. Beyond the clear USD advantage from nominal yield spreads, JPY faces other challenges. Subsequently, economists at Scotiabank expect the US/JPY to edge higher towards 120 in 2023.

JPY remains prone to weakness

“Rising US yields will likely draw more flows to US Treasury product from Japanese investors and support USD gains versus the JPY.”

“Aside from the direct implications of the war in Ukraine, we think that the risk of tenser China/Taiwan relations represents another potential headwind for the JPY in the future.”

“We are forecasting USD/JPY ending this year at 118 and at 120 in 2023 (compared with Bloomberg consensus estimates of 116 and 115 respectively). The risk to our forecast is clearly to the upside in the near to medium-term”

“The USD is looking overbought in the short run but we expect solid support on minor USD/JPY dips to the mid-116s and unless there is a clear reversal in the recent USD gains shortly, we think USD gains mean the technical path for the USD to push on towards 125 is becoming clearer.”

This article was originally published by Fxstreet.com.Read the original article here.

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