Yen dances to the Fed's piping. Forecast as of 08.05.2023

2023.05.08 2023.05.08
Yen dances to the Fed’s piping. Forecast as of 08.05.2023logo

Japan’s lower recession risks than in the USA and the BoJ’s need to normalize policy support the USDJPY’s bears. However, it’s too early to brush the USD aside. Let’s discuss that and make a trading plan.

Weekly fundamental forecast for yen

Markets prefer sticks over carrots. Unlike Christine Lagarde, who is always searching for compromises, the former ECB President Mario Draghi would often bring the euro to life with his personal decisions, for example. Thus, Jerome Powell’s statement that investors can have their own opinion regarding rates knocked the USD off its feet. The USDJPY quotes collapsed amid rumors that May’s rise of borrowing costs to 5.25% may be the last in this cycle, and we successfully opened shorts at 137.2.

The yen weakened at the beginning of May as investors were disappointed with new BoJ Governor Kazuo Ueda’s reluctance to hint at abandoning monetary stimuli at his first BoJ meeting as chief. At the same time, the unexpected growth of consumer prices in Tokyo and the rise in 10-year inflation expectations to 0.82% — the highest since January —are fuelling rumors that the yield curve control policy will be abandoned. That supports the USDJPY bears.

USDJPY and inflation expectations in Japan

Source: Bloomberg.

At the same time, a slow recovery of Japan’s economy after COVID-19 lowers recession risks, in contrast to the USA, where those are quite high. The Japanese manufacturing sector activity reached a historical peak in April. However, the Purchasing Managers Index in the manufacturing sector continues to linger below 50, pointing to a reduction.

So, speculation that the BoJ would normalize policy, the end of the Fed’s tightening cycle, and lower recession risks in Japan work in the USDJPY bears’ favor. However, the US strong April jobs report proved that markets underestimated the Fed’s intention to keep the fed funds rate at 5.25% until the end of 2023. This factor can help the dollar to consolidate a bit against the yen.

The analyzed pair is sensitive to bond yields, so the bulls started a counter-attack after yields grew amid an optimistic jobs report. Their counter-attack can develop even further if the US inflation makes us a surprise. Bloomberg experts forecast consumer prices will continue growing at 5% while core inflation will slow down from 5.7% to 5.5%. The latter has been in the 5.5-5.7% range for four consecutive months, indicating that high prices will remain high for a while.

US core inflation dynamics


Source: Bloomberg.

Weekly trading plan for USDJPY

According to CIBC Private Wealth, the Fed’s surprise rate hike to 5.5% in June will be a response to US employment and inflation stats. So, April’s CPI becomes a key factor. Higher-than-expected data will raise US treasury yields and allow us to open longs in the USDJPY with a target at 136 and 137.2.

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.

Rate this article:

{{value}} ( {{count}} {{title}} )

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *