In 2022, the US dollar was the king in Forex. However, by the end of the year, there are signs that it will be replaced. Which currency will be the Forex leader in 2023? Let us discuss the Forex outlook and make up a USDJPY trading plan.
Fundamental yen forecast for six months
In 2022, the US dollar reigned in Forex amid the Fed's aggressive rate hikes, the status of a major safe-haven asset, and the strength of the US economy. Everything will turn upside down in 2023, and investors wonder what currency will be the leader. I see the Japanese yen. And it’s not only me. There are plenty of banks and investment companies that hold a similar point of view. Barclays and Nomura are forecasting a 9% decline in USDJPY next year, while Vontobel Asset Management sees the pair at 100.
The fastest hike in the federal funds rate in decades widened the yield the US-Japam bond yield spread, fueling the flow of capital from Asia to North America and supporting the USDJPY rally. At the end of 2022, due to the intention of the Fed to slow down the monetary tightening pace, the situation changed radically, and the trend should continue in 2023. Treasury yields fell, and the USDJPY trend has turned down.
Dynamics of bond yields
Moreover, next year the Bank of Japan may abandon the yield control policy. Now the regulator has to maintain an ultra-easy monetary policy to convince the public that inflation will rise. But if it really grows and consolidates above the 2% target, BoJ will be forced to do something about it. Yields on Japan's bonds will rise, the spread with US peers will narrow, and money will flow in the opposite direction, from North America to Asia, pushing the USDJPY down.
Currently, the US economy looks strong, but the risk of a recession remains. Most likely, the economy’s performance will worsen due to the Fed’s aggressive monetary tightening and the reduction of household balance sheets amid the exhaustion of fiscal stimulus. Japan's GDP in the third quarter, on the contrary, was better than expected, and the growth in consumer spending in October suggests that the economic performance in the fourth quarter will be even stronger. Economies are about to turn around and move in different directions, which gives the USDJPY downtrend additional momentum.
The decline in the Treasury yields deprives the US dollar of its status as the leading safe haven. I have already noted that now the yen is seen as the primary safe-haven asset. Vontobel agrees with this viewpoint, arguing that USDJPY bears can benefit from a downturn in financial markets. At the same time, forecasts of ¥130 per dollar do not surprise anyone, although the consensus estimate of Reuters experts is 139.17, 136.17, and 132.67 in three, six, and twelve months.
Projections for USDJPY
USDJPY trading plan for six months
Irrespective of how the busy week ending on December 16 finishes, the USDJPY trend has been determined. The outlook for the next six months is bearish. Therefore, it will be relevant to sell the US dollar versus the Japanese yen on the corrections; the targets are 131.8, 130.2, and 127.6.
Price chart of USDJPY in real time mode
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