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Added to the uncertainty about the end of the Fed’s monetary tightening cycle are doubts about the willingness of the Bank of Japan to maintain stimulus. How does this affect USDJPY?
Weekly Japanese yen fundamental forecast
The stock indexes rally proves that the recession can be averted, while the inverted yield curve speaks the opposite. What shall we do with the Japanese yen? The USDJPY roller coaster reminded the events of early spring when hedge funds made large-scale bets on the growth of the pair’s rise and lost money due to the banking crisis in the United States. After the speculators changed their views, the dollar strengthened rapidly against the yen amid a potential acceleration of US inflation and the continuation of the Fed’s monetary tightening cycle.
In the middle of summer, a sense of deja vu returned to the markets. The sharp drop in USDJPY was due to expectations of the end of the Fed’s tightening cycle and talks that the Bank of Japan will soon have to abandon monetary stimulus. The monetary normalizations seemed decided as Japan’s inflation has been exceeding the target of 2% for several months now.
Dynamics of Japan’s inflation
Source: Bloomberg.
If Kazuo Ueda and his fellow central bankers do not want to resort to currency intervention again and understand that keeping huge amounts of debt on the balance sheet is no longer producing the desired result, they need to change something. However, the BoJ governor’s constant dovish tone makes the market doubt the adjustment of monetary policy. Only 5 out of 22 Reuters experts, or 23%, predict that the central bank will change its course in July. On the eve of the June meeting of the regulator, there were 43%. Only 18% of economists surveyed by Bloomberg believe that the Bank of Japan will change the settings of the yield curve targeting mechanism. The most likely month for this to finally happen is October.
These dovish forecasts, in addition to the US dollar strengthening amid US positive domestic data and expectations for the Fed’s dovish speech, push the USDJPY up. Asset managers have been fooled again. In the week ended on July 18, they were shrinking yen shorts at the fastest pace in more than three years. They must be exiting losing trades now.
Dynamics of yen speculative positions
Source: Bloomberg.
I suppose the BoJ can still surprise the markets. Although the changes in monetary policy will hurt Kazuo Ueda’s reputation as a transparent and clear speaker, the decision to expand the target yield range should be made suddenly. With hints of such moves, investors will bring bond yields to the upper limit of the +/-0.5% trading channel.
Weekly USDJPY trading plan
Most likely, the central bank will raise its inflation forecast for the 2023/2024 financial year from the current 1.8% to 2.5%. It would be strange unless it did if prices consistently exceed the target, and the government predicts their growth by 2.6%. Will this be enough to press the USDJPY down? I believe this may happen after the Fed meeting. Therefore, when the price breaks out the support at 140.75, one could enter sell trades.
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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