2023.08.28 2023.08.28
Central Bank tracks the Yen. Forecast as of 28.08.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
Is the USDJPY rally indeed becoming more significant for Kazuo Ueda and his colleagues than the Japanese bond yields? Judging by the decrease in the debt market volatility, this makes sense. Let us discuss the Forex outlook and make up a trading plan.
Weekly Japanese yen fundamental forecast
Although the Japanese inflation has exceeded the 2% target for 16 consecutive months, Kazuo Ueda in Jackson Hole insists that it falls short of it. This is the central bank’s opinion, which is willing to stick to its ultra-easy monetary policy, holding back the Japanese bond yields. The USDJPY bears look discouraged. How long will all this be going on?
Dynamics of Japan’s inflation
Source: Reuters
Only one of 22 Reuters experts believes the BoJ will begin normalizing monetary policy in 2023. Four voted for the first quarter of 2024, five for the second, and six experts each for the third and fourth quarters of the next year. At the same time, 73% of respondents believe the yield curve control will be abandoned in 2024. In the previous survey, the figure was 50%.
Kazuo Ueda’s stance convinced investors of the long-lasting monetary stimulus. Moreover, the volatility of the Japanese debt market is declining. On the contrary, USDJPY is rallying up. The pair is trading at the levels from which currency interventions started at the end of 2022. Furthermore, investors believe the weak yen, rather than bond rates, will trigger new yield curve management policy adjustments. Let me remind you that in July, BoJ extended the range for 10-year bonds to +/-1%.
Dynamics of yen and Japan’s bond market volatility
Source: Bloomberg
However, not only the Bank of Japan affects the yen FX exchange rates. The USDJPY rally is driven by the widening yield spread between US and Japan’s bonds. According to Credit Agricole, US bond yields will remain the same or start to decline in 2024 as the Fed’s monetary policy eases. This will drop the dollar against the yen and give the BoJ the time it needs to maintain monetary stimulus.
In my opinion, USDJPY has either already hit the ceiling or will do so in the near future. A weak yen is by no means the best solution for Japan’s economy, which depends on imports of energy resources and raw materials as a whole. In addition, the devaluation is not particularly encouraging for automakers with plants outside the country. Benefits from exports are canceled out by numerous side effects and increase the risks of foreign exchange interventions.
At the same time, the chances of a downside correction in the Treasury yield are growing. The Fed’s aggressive monetary tightening with an increase in the federal funds rate to a 22-year peak cannot but affect the US economy. If it has so far maintained stability, this does not mean that it will continue to do so. The deterioration of the US domestic data is the key to the decline in the Treasury yield and USDJPY. However, nobody knows when exactly this process will begin.
Weekly USDJPY trading plan
I suppose one could consider selling the USDJPY. If the US jobs market shows the signals of cooling down or the USDJPY fails to go above the resistance at 146.75, one could think about entering shorts.
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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