Yen goes into shadows. Forecast as of 08.01.2024

The market expected signals from the Bank of Japan about monetary policy normalization as early as January, but the natural disaster forced the BoJ to act cautiously. How will this affect USDJPY? Let us discuss the Forex outlook and make up a trading plan.


Weekly Japanese yen fundamental forecast

The earthquakes that hit Japan and the market's revaluation of expectations for the Fed's monetary expansion allowed the USDJPY bulls to achieve their best result in the last 16 weeks. Due to the natural disaster, BoJ officials will think twice before normalizing monetary policy, which reduces the chances of the central bank abandoning negative rates in January. Together with rising US Treasury yields, this will put serious pressure on the yen.

Weekly yen dynamics


Source: Bloomberg.

According to RBC BlueBay Asset Management, earthquakes in Japan in the first few days of 2024 (more than in the last three years combined) created uncertainty for the central bank and delayed the start of normalization of monetary policy. Daiwa Securities believes the earthquake will reduce production, and the government will be forced to create a new budget to deal with the disaster. Mizuho Bank says that if the overnight rate does not rise in January, it is doubtful that it will do so during the rest of the year.

The yen is under pressure from growing risks of rising US Treasury yields. Debt rates have already begun to go up against the backdrop of strong employment data for December. It increased the chances of the soft landing turning into GDP growth, which would raise inflation and force the Fed to keep borrowing costs at 5.5% for an extended period.

In addition, political uncertainty is growing in the United States, which could force investors to demand a higher risk premium and increase Treasury yields. A divided Congress must decide on spending within two weeks to prevent a government shutdown. At the same time, the presidential race begins in January, which promises to be very unpredictable in 2024.

It is not surprising that investors are gradually abandoning the yen in favor of the US dollar. Due to rising Treasury yields, the greenback will overtake the yen among the safe-haven currencies. Traders exit USDJPY bearish trades, while reversal risks signal a continuation of the pair's rally.

Dynamics of USDJPY and reversal risks


Source: Bloomberg.

The USDJPY growth risks intensifying in the event of strong US inflation data for December. Figures close to or higher than Bloomberg experts’ forecasts will reduce the chances of the Fed’s monetary policy easing starting in March.

Weekly USDJPY trading plan

However, divergence in the monetary policies of the Fed and the Bank of Japan will allow the yen to strengthen against the US dollar by the end of 2024. In the short term, the risks of USDJPY growth due to earthquakes and the new market’s expectations for a reduction in the federal funds rate are increasing. In this regard, exit short trades entered on the growth to 146 and switch to temporary purchases on a breakout of the resistance at 144.95.

Price chart of USDJPY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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