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The Japanese government talks so often about intervening in the Forex market that if USDJPY crosses 152 and official Tokyo does nothing, it will be a blow to BoJ’s reputation. Meanwhile, how effective are the interventions? Let’s discuss the Forex outlook and make up a trading plan.
Weekly fundamental forecast for Japanese yen
The USDJPY consolidation is akin to a tightly wound spring. Any external factor can trigger a release, leading to either profits or losses. It’s crucial to be prepared for both outcomes or consider exiting the market. Remember, nothing ventured, nothing gained. Asset managers and hedge funds, who have amassed net short positions on the yen to the highest level in 17 years, are poised to test the government’s resolve. If the regulator fails to intervene in the currency market as promised, it could damage its credibility.
JPY speculative net positions
Souce: Bloomberg.
Only the second currency intervention was successful in 2022. Moreover, the USDJPY pair fell due to market expectations that the Fed would end its tightening cycle sooner than expected. Otherwise, US Treasury yields would not have fallen, and the yen would not have strengthened against the US dollar.
Currently, the futures market is stalling. It no longer believes the FOMC’s forecast of three rate cuts in 2024 but expects only one or two. As a result, interest rates in the US debt market are rising much faster than in Japan. The widening yield differential is contributing to the USDJPY rally. In such an environment, any official intervention from Tokyo will be ineffective. According to Bank of America, the greenback may rise to 160 yen if the Fed does not ease monetary policy at least once this year.
Market expectations for Federal funds rate
Souce: Wall Street Journal.
As for the Bank of Japan, it intends to act extremely slowly. Kazuo Ueda stated that inflation would be at 2% in the summer or fall. Meanwhile, The market is pricing in a second overnight rate hike in the third quarter. The BoJ is not expected to make any decisive moves in the April-June period, reinforcing the USDJPY’s uptrend.
Despite the rise in Japanese bond yields, real bond yields remain exceptionally low, which is one reason why the yen is not an attractive investment. The yen is also hampered by the low volatility in the Forex market and its use as a funding currency in carry trade operations. Furthermore, there are doubts in the market about the effectiveness of devaluation on exports and the success of currency interventions.
While the Japanese government considers the USDJPY rally baseless, the fact that the 10-year bond yield is above 4.3% in the US and below 1% in Japan suggests that the pair’s growth is not purely speculative.
Weekly USDJPY trading plan
If resistance at 152 is broken, the USDJPY rally may continue to 154 and 155.5. At the same time, the risk of currency intervention will increase. In this case, wait for a pullback and buy USDJPY cheaper, but in such a scenario, you may miss a profitable trade.
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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