US dollar set to retreat to 95 yen by the end of 2016, Barclays says

Strength in the Japanese yen was set to continue throughout 2016 as the 'over-shooting' versus other currencies engineered by the country's central bank unraveled like a 'coiled spring', Barclays said.

The "remarkable success" of the Bank of Japan in boosting inflation and inflation expectations in the archipelago was only achieved by inducing a degree of weakness in the yen which was at odds with the Japanese economy's fundamentals relative to those of its trading partners.

Now, like a 'coiled spring', the wave of risk-aversion washing over global capital markets - Japanese savers are well-known for being highly risk-averse- had trigerred an unwinding, the broker said in a research note sent to clients on Friday.

Hence, the economists believed 'long' positions in the Japanese yen remained attractive and revised their forecasts for the US dollar/yen currency pair down to 100 through the end of the third quarter of 2016 and to 95.0 yen by the end of the year.

In their opinion, "the current bout of global risk aversion has set in motion the unwinding of that spring, which we expect to continue as the “overshoot” at the core of our JPY view reverses, even in the face of further BoJ easing in March and possible FX intervention."

"Historically, JPY appreciation from extreme undervaluation, especially amid risk aversion, has been rapid and large. We expect this appreciation to be the same," they added.

Nevertheless, they cautioned that there were risks to their view in both directions.

On the one hand, an "all-out" effort by the BoJ and the administration of Prime Minister Shinzo Abe to counter strength in the currency could spark fears of what economists term 'fiscal dominance' and lead to "nearly unbounded" upside in the US dollar/yen pair.

Conversely, should the current appreciation in the yen evaporate domestic inflation expectations then "the entire “Abenomics trade” in the JPY may unwind, sending USDJPY to historic lows".