In a note to clients on Wednesday, Citi analysts highlighted the growing risk of a drop below ¥130 in the near term due to the erosion of bullish momentum in the currency pair.
“The USDJPY decline has been sharper than we expected and there has been a clear loss of long-term bullish momentum,” Citi said.
Citi had initially expected a symmetrical triangle to form over the next six months, but this scenario has now become less likely.
Instead, the bank said it sees a more bearish pattern, likely a descending triangle apex. An even more worrying possibility is an island reversal formation, which could take USD/JPY below the ¥130 mark, according to Citi analysts.
The bank recommends caution until USD/JPY can recover to its 21-day moving average, currently around ¥143.5.
They point out that the pair remains overvalued and their multifactor model estimates a fair value of around ¥137/$.
This pattern, which had tracked the actual USD/JPY pair until early 2024, is believed to have started to diverge in February due to JPY carry trades stemming from significant short-term interest rate differentials.
The sharp correction in USD/JPY from its recent high of ¥162/$ to a low of around ¥140/$ aligns with Citi's previous predictions, reversing much of the previous overvaluation.
However, they emphasize that the pair still has room for further correction as the current value remains higher than their model's estimate.
Given the potential downside risk, Citi urges market participants to remain cautious and closely monitor the pair's trajectory.
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