Analysts at CIBC, point out the USD/JPY appears to be pricing in a scenario more like the bond market, so if the Federal Reserve cuts rates less aggressive as expected, the yen could underperform.

Key Quotes:

“Bond markets are pricing in about 100bps worth of cuts from the Fed, suggesting possibly a mild recession scenario. Equity markets clearly aren’t anticipating anything that bad. Where does the risk-off yen fit in?”

“Given where USDJPY is compared to the end of last year, it appears to be pricing in a scenario more like the bond market. As such, if the 50bps worth of cuts from the Fed (plus other policy easing globally) is enough to shore up growth that could have the yen underperforming other currencies such as the euro and sterling against the US$ next year.”