Citi Warns of Potential Decline for USD/JPY Currency Pair

Author: Thomas Cooper Updated: 09-18-2024 01:06 PM

Citi's Warning on USD/JPY Movement

In a recent update to clients, analysts at Citi have voiced concerns about the USD/JPY currency pair, specifically indicating that there is an increasing risk of it dropping below ¥130 in the foreseeable future. This downturn is attributed to a notable erosion of bullish momentum within the pair.

Analysis of Recent Trends

Citi's analysts expressed, “The fall in the USD/JPY has been steeper than we had expected, and there has been a clear loss of long-term bullish momentum.” Initially, expectations revolved around the formation of a symmetrical triangle top within a six-month timeframe. However, the prevailing circumstances have shifted these anticipations considerably.

Emerging Patterns

Rather than the previously suggested symmetrical triangle top, Citi now foresees a more bearish configuration forming, potentially resembling a descending triangle top. Analysts have even flagged the possibility of an island reversal formation emerging, which could push the USD/JPY rate beneath the ¥130 threshold.

Moving Averages and Valuation Insights

In light of the current situation, Citi is advising caution until the USD/JPY can regain its 21-day moving average, which is presently around ¥143.5. The overall sentiment is that the currency pair remains overvalued, with the multifactor model estimating a fair value closer to ¥137 per dollar.

Factors Affecting Market Dynamics

This multifactor model, historically in tune with the actual USD/JPY values until early 2024, started showing divergence back in February. This was largely due to JPY carry trades that emerged from substantial short-term interest rate differentials.

Reevaluation of Predictions

The recent sharp correction in the USD/JPY, which has seen it drop from a peak of around ¥162 per dollar to a low of approximately ¥140, aligns well with Citi's earlier forecasts, correcting much of the previous overvaluation. Analysts at the bank stress that, even after this adjustment, the currency pair still possesses potential for further correction as its current valuation continues to exceed their model's estimate.

Given these evolving dynamics and potential risks, Citi strongly urges market participants to remain vigilant and keep a close watch on the trajectory of the USD/JPY currency pair.

Frequently Asked Questions

What does Citi forecast for USD/JPY?

Citi predicts an increased risk of USD/JPY falling below ¥130 due to weakening bullish momentum.

What is the significance of the 21-day moving average?

The 21-day moving average is seen as a critical point for the USD/JPY, with Citi advising caution until this level is reached.

Why does Citi consider the USD/JPY overvalued?

Citi’s multifactor model suggests a fair value around ¥137 per dollar, indicating that the pair remains overvalued at current levels.

What corrections has the USD/JPY experienced recently?

The USD/JPY has corrected sharply from a peak of ¥162 to around ¥140, aligning with Citi's earlier predictions on overvaluation.

What should investors do according to Citi?

Citi advises investors to exercise caution and closely monitor the pair’s movements in light of the potential downside risks.

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