Yen: trapped. Forecast as of 26.02.2024

While Japanese Ministry of Finance officials continue to make verbal interventions, and the BoJ insists on normalizing monetary policy, USDJPY is still growing. Let us discuss the Forex outlook and make up a trading plan.


Weekly Japanese yen fundamental forecast

In 2023, the financial world was closely watching the confrontation between the Fed and the markets. In 2024, the BoJ took the place of the Federal Reserve. Despite the slowdown in Japanese inflation, the BoJ insists on normalizing monetary policy. Investors agree, but this is not enough to reverse the USDJPY uptrend. Hedge funds are actively selling the yen, looking at the all-time highs of the Nikkei 225.

It's been 34 years since the Japanese stock index set a new record. However, in the 1980s, Japan was a leader in global economic growth, but now the situation in the country is unstable. Due to the recession in the second half of 2023, Japan left the top three largest economies in the world. The main reason for the Nikkei 225 rally is stunning corporate profits driven by a weak yen amid an export-led economy. As a result, according to a study by Societe Generale, earnings per share are falling everywhere except Japan.

Earnings per share dynamics

Source: Bloomberg.

Japan's equity market appears undervalued, leading to a flow of capital from North America and Europe to Asia as part of a portfolio diversification process. At the same time, foreign investors insure currency risks by buying USDJPY. However, the cost of hedging the yen is negative. That is, traders can earn additional money due to the increase in Nikkei 225 capitalization. It is not surprising that they added up to JPY net shorts x2 since the beginning of the year.

The Ministry of Finance does not stop with verbal interventions, and Kazuo Ueda continues to hint at the monetary normalization. The trend CPI led by services inflation is accelerating as a strong labor market pushes up wages, the Bank of Japan governor said. This can be argued by looking at the slowdown expected by Bloomberg experts in consumer prices in January from 2.6% to 2.1% and core inflation from 2.3% to 1.8% YoY. But decisions on monetary restrictions are made by the Japanese regulator. BoJ probably considers the decline in CPI growth rates to be a correction to the uptrend.

Thus, official Tokyo opposes the financial markets, which narrows the USDJPY trading range. The yen's lowest monthly volatility since March 2022 is bad news for it as a funding currency for carry trade operations.

Yen volatility dynamics

Source: Bloomberg.

Weekly USDJPY trading plan

According to Bloomberg experts, the start of BoJ normalization will begin in April with a probability of 80%. The reversal of the uptrend is close, so sell the pair if it falls below 150.1 or when the price rebounds from the resistance at 151.2.

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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