Citi Sees Limited Upside for USD/JPY, Expects Rebound Before Decline By Investing.com

Citi provided commentary on the currency pair, drawing parallels with historical currency movements and forecasting potential future trends. The financial services company suggested that while USD/JPY’s advantage was narrower than initially anticipated, the pair was unlikely to fall below ¥140/$ until next year.

Citi anticipates a possible rebound between ¥151/$155 and ¥155/$155 before any significant decline.

The firm’s analysis indicates that USD/JPY has preemptively factored in a narrowing of the interest rate differential to around 4%. The next sizeable decline in the pair is expected to occur after the real interest rate differential between the US and Japan narrows to below 4%, a scenario that I believe could develop over the next six months. Looking ahead, Citi forecasts USDJPY below ¥140/$ in 2025, ¥130/$ in 2026 and ¥120/$ in 2027.

Citi also referred to the sharp drop in USD/JPY during the 1998 LTCM crisis as a historical precedent, noting the significant decline in the currency pair after periods of uptrends driven by the Japanese yen (JPY) in 1998 and 2007. The firm suggests that the USDJPY could face a similar risk of a 30%-40% correction in a few years or even months as seen in the past.

The commentary highlighted that historically USD/JPY rose when the interest rate spread exceeded 4.75% and tended to fall when the spread was below this threshold. Citi pointed out that the current wide interest rate differential and high carry/volatility ratio could lead to a temporary resurgence of the JPY carry trade.

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