Though this would mark a major change for BoJ policy, other tweaks may also prove supportive for the currency. Our baseline macro view now looks for a further relaxation of YCC later this year, which would form an additional bullish tailwind for the yen,” said Shatil. “What has changed for the yen has been the earlier-than-expected BoJ pivot. The yen strengthened against the dollar after the news. The central bank announced it would allow 10-year Japanese yields to climb as high as 0.5 percent, compared with 0.25 percent previously.

This move was in line with the J.P. Morgan Research view, but the timing was earlier than expected. In addition, the BoJ shocked markets in December by relaxing its yield curve control (YCC) policy of pinning yields close to zero. recession, should clear the runway for a lower repricing of the dollar/yen pair in 2023,” said Benjamin Shatil, Head of Japan FX Research at J.P. Morgan. yields and a peaking out in terminal rate expectations into 2023, alongside the risk of a moderate U.S. While the Japanese yen closed out 2022 almost 18% down versus the dollar, J.P. Morgan Research has been expecting it to strengthen in 2023. This was largely due to Japan’s yawning trade deficit and the Bank of Japan’s (BoJ) dovish stance. The dollar/yen pair breached 150 in October 2022, marking a 32-year low. “As such, even though we think near-term growth momentum suggests 1.10 could be broken, we do not yet pencil larger gains for the second half of 2023.” Also, the Fed might have to deliver more rate hikes, resulting in further ECB tightening,” noted Chandan. recession risks still pose a threat to growth trade. “Energy dependence and geopolitical risks will be a theme for the region for years to come and simmering U.S. In light of these developments, J.P. Morgan Research expects euro/dollar to approach 1.10 in March 2023, before declining to 1.08 in September 2023. This sharp fall in gas and electricity prices benefits the economy overall and should mean the region can avoid the harsh recession that was expected. Title Transfer Facility (TTF) gas prices, the key benchmark for gas prices in Europe, have collapsed to pre-invasion lows as the continent experiences the warmest weather on record. A few months on, each of the motivating factors for this downbeat view has been challenged, if not reversed outright. “In our view, the top trading themes for 2023 are regional growth rotation away from the U.S., at least temporarily toward China, and greater differentiation with high beta FX.”īack in November 2022, J.P. Morgan Research took a dim view of the euro, with euro/dollar forecast to hover around 0.95-1.00 in 2023. exceptionalism seems to point toward a period at the trough of the dollar smile, whose duration is uncertain,” said Chandan.

“We still hold longer-term reservations about the broader trajectory of the global cycle, which we think should be generally dollar-positive, but the interim period of both positive global surprises and less U.S. Overall, while J.P. Morgan Research still forecasts modest dollar strength in 2023, it is taking a neutral stance on the USD. Markets are now aggressively pricing Fed easing on the back of growing signs of disinflation, while the outlook for global growth this year is no longer looking as pessimistic as it did earlier in 2022,” said Meera Chandan, Global FX Strategist at J.P. Morgan. “The confluence of factors that had proved so supportive of the dollar earlier in 2022 has since inverted. Such weakness reflects a mean reversion from the dollar’s outsized gains in 2022. After a historic bull run last year, the nominal broad dollar index fell almost 7% between November 2022 and January 2023.

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