Analysts at Danske Bank, expect the USD/JPY pair to bounce back above 112 if the Bank of Japan keeps its policy unchanged next week, but they see little potential for a sustained rally above July's high at 113.17 in the near term. 

Key Quotes: 

“If we are right in our call that the BoJ will stay put next week, we expect USD/JPY to bounce back above 112. The past weeks’ rally (up until Friday’s sell-off) in USD/JPY has been out of sync with global risk sentiment and the US FI market, and the correlation between USD/JPY and 10Y US yields has collapsed as a pickup in Japanese foreign equity buying and a build-up in speculative short JPY positions in the FX market has been driving yen selling.”

“We doubt these effects will continue to support the cross in coming months, and taking FX positioning, the overall fragile risk environment and not least a continued risk of a BoJ policy change in Q3 into consideration, we see little potential for a sustained rally in USD/JPY above July’s high at 113.17 in the near term. We target 112 in 1-3M. Longer term, we still expect USD/JPY to remain underpinned by relative interest rates and continued global growth, targeting 114 in 6-12M.”

“If the BoJ hikes the 10Y yield target next week, JPY is likely to come under substantial appreciation pressure and we would expect USD/JPY to break below 108 in this scenario, driven by higher Japanese yields, short JPY positioning unwinding and rising expectations of further BoJ normalisation.”