Yen is weak. Forecast as of 27.02.2023

2023.02.27 2023.02.27
Yen is weak. Forecast as of 27.02.2023logo

There will be no recession in the US economy in the near future, and the Bank of Japan, even under new leadership, will continue to pursue an ultra-easy monetary policy. What does all this mean for USDJPY? Let us discuss the Forex outlook and make up a trading plan.

Weekly yen fundamental forecast

Markets can be wrong from time to time. In January, investors hoped that the weak US economy would force the Fed to turn dovish in 2023. They also expected that the acceleration of Japanese inflation to 4.2%, the highest level in more than 40 years, and a new governor would force the Bank of Japan to continue the monetary normalization, which started in December. These ideas sent the USDJPY to its 8-month lows in January. However, when it became clear that the reality was different, the pair rocketed up.

Just a week ago, investors expected that Haruhiko Kuroda would make a gesture of goodwill towards his successor and abandon the yield curve control at his last BoJ meeting in March. However, the governor of the Bank of Japan, who is leaving his post in April, does not seem to be willing to meet the market expectations. He argues that the rise in inflation to 4.2% is a temporary phenomenon, due to the desire of producers to shift the growing costs onto the shoulders of consumers. The situation in Japan is fundamentally different from the United States. Haruhiko Kuroda expects the CPI to slow below 2% in both the 2023 and 2024 financial years.

Dynamics of Japan’s inflation

Source: Bloomberg.

Even more pressure on the yen was exerted by the speech of the main candidate for the post of the central bank governor, Kazuo Ueda. According to him, 4.2% is a figure that should be the peak. Inflation should be expected to fall below the target by the middle of the next fiscal year, and it makes sense for the BoJ to stick to an ultra-easy monetary policy. Kazuo Ueda doesn’t think it’s his mission to come up with some fabulous monetary policy that will solve all problems. The central bank still needs to consider the incoming data.

According to Saxo Capital Markets, neutral comments of the next Bank of Japan head, contrary to the hawkish expectations of the market, suggest that USDJPY will rise again. Goldman Sachs agrees with this, suggesting that even a hawkish shift of the central bank won’t support the yen. The USDJPY rally will be supported by the US-Japanese bond yield spread.

Dynamics of USDJPY and US-Japan bond yield spread

Source: Bloomberg.

According to Nordea Markets, the federal funds rate could rise to 6% amid a strong economy and the return of inflation to growth, and the 10-year Treasury yield could be up to 4.5%. If this is the case, the USDJPY uptrend will continue.

Weekly USDJPY trading plan

In fact, the yen has lost its main advantages — the Bank of Japan hawkish shift after the change of the governor and expectations of an imminent recession in the US economy, which in January contributed to a decrease in the Treasury yield. Unless the US domestic data do not worsen, the USDJPY rally should continue. At the same time, the level of 134.2, which previously acted as resistance, currently serves as the main support. As long as the price remains higher, it will be relevant to buy with targets at 138 and 141.

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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