The stand-out funding currency, the Japanese Yen (JPY), is the worst performer at -6% year-to-date versus the US Dollar (USD). Economists at ING analyze USD/JPY outlook.

Under-valued, but weighed by the carry trade

We cannot see the low volatility/carry friendly environment turning anytime soon, suggesting the Yen stays weak. However, we now think that the JPY is close to 15% under-valued on our medium-term fair value models.

A substantial turn lower in the USD/JPY probably requires a turn in the broad Dollar trend, something we look for late in the second quarter. Should USD/JPY make it into the 155.00/160.00 area beforehand, we would see that as a good medium-term level for corporates to ratchet higher their USD receivables/JPY payables hedging plans.