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Japanese yen likely to appreciate moderately against US dollar in coming quarters

The USD/JPY currency pair has rallied robustly since falling to 100 after the key central bank meetings last month. The pair progressed towards 104. During its meeting in September, the Bank of Japan stated a change in strategy, to a “yield curve targeting” regime. The central bank’s key objective is to keep the 10-year JGB rate at around 0 percent to induce long-end curve steepening, noted Lloyds Bank in a research note.

The market is doubtful because of the dilemma this shows between taking action to tighten monetary conditions and maintain policy credibility. The Bank of Japan continues to content with a tough economic scenario. Expectations for inflation are weak, while retail sales and overall household spending both disappointed last month. Also, the unemployment rate rose to a higher-than-anticipated 3.1 percent in August.

On the contrary, the FOMC kept its interest rates on hold during its previous meeting, in spite of perpetually discussing the relative strength of the U.S. economy. However, the vote was more “hawkish” than anticipated. Three members had proposed an immediate raise in the rates by 25 basis points. Subsequent comments from the Fed officials have kept the door open for a hike during its December meeting.

The Japanese yen is expected to moderately appreciate in the coming quarters. However, with the prospects of rate hikes in the U.S. and extended long JPY positioning, the USD/JPY would be closer to the expected fair value of around 105 by the end of next year, according to Lloyds Bank. The currency is expected to trade at around 103 against the U.S. dollar by the end of this year, added Lloyds Bank.

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