Yen stabilizes. Forecast as of 19.12.2022

2022-12-19 2022-12-19
Yen stabilizes. Forecast as of 19.12.2022logo

In less than two months, the USDJPY pair sank 10%. Did the BoJ’s foreign exchange intervention help the yen? Or has the US dollar lost its status as the main safe-haven currency? Maybe, the yen is supported by an impending global recession? Let’s talk about this topic and make up a trading plan.

Weekly yen fundamental forecast

The dollar and the European currencies were jumping up and down in mid-December, while the yen has stabilized. The yen volatility is falling, and the options market gives a 70% chance that USDJPY will trade in the range of 135.6-139.7 by the end of the year. The USDJPY should be trading flat, even despite the talks about a possible end to the BoJ ultra-easy monetary policy in 2023 and the growing risks of a global recession. This is how the market works. The trends are followed by consolidations, and consolidations are replaced by new trends. Can the USDJPY traders take a rest?

The reasons for the USDJPY 10% drop from October highs are to be argued. Some analysts suggest the trend must have been turned down because of the BoJ FX interventions. Others argue that the BoJ interventions would not have been efficient but for the slowdown in the Fed’s monetary tightening. Besides, the dollar could be weakening because it has lost its status of a major safe haven. I believe the truth is somewhere in between.

Currency intervention would hardly have succeeded if but for the Fed’s willingness to slow down the monetary tightening pace. However, the USDJPY bulls have been discouraged. The yen looks more attractive than the greenback as a safe haven when Treasury yields fall. In this regard, the drop in Treasury yields and rising expectations of a global recession have become the main drivers for the USDJPY downtrend.

Dynamics of recession risks in world’s leading economies


Source: Bloomberg.

Furthermore, the BoJ’s willingness to turn hawkish in 2023 could lead to turmoil in money markets and strengthen the yen. According to Reuters source familiar with the matter, the BoJ could abandon the yield curve control policy rather than widen the target range. In the second case, there will be rising risks of a rate hike, which will encourage investors to enter longs.

The BoJ’s abandonment of its ultra-easy monetary policy will hit Japan’s banking. A rise in the Japanese bond yields could affect the bond yields all over the world, including Treasuries.

Dynamics of bond yields

Source: Bloomberg.

I don’t think the BoJ will cancel monetary stimulus. The regulator sticks to its wait-and-see attitude, while other central banks have aggressively raised rates. And now, when global central banks will have to lower interest rates amid the impending recession, the Japanese central bank can safely remain passive.

Weekly USDJPY trading plan

The main USDJPY bearish driver is the global recession. Continuous monetary tightening by the world’s leading central banks will bring it closer. I do not rule out a short-term strengthening of the greenback, but the medium-term trend will remain down. When the price breaks out the resistance at 138, one could enter short-term purchases, followed by medium- and long-term sell trades when the market rebounds from resistances at 139.5, 140.5, and 141.4.

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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