It just happened so that all serious movements in USDJPY were connected with the actions of the Bank of Japan. First, there were currency interventions, then, there were loud statements that forced the pair to change the trend direction. Does the yen price depend only on BoJ? Let’s talk about this topic and make up a trading plan.
Weekly yen fundamental forecast
The Bank of Japan seems to be doing whatever it wants with the yen. With the help of currency interventions, the USDJPY long-term trend turned down. Haruhiko Kuroda’s statement that the widening of the bond yield target range in December is not the first step towards the normalization of monetary policy discouraged the bears. In fact, without a change in the foreign environment, the yen would hardly be so obedient.
In October, the USDJPY went down from its highest level in over three decades. It, first of all, was facilitated by a change in the Fed’s outlook. In January, the yen’s weakening can be associated with an improvement in global risk appetite. Rising optimism about the outlook for the global economy could be a serious obstacle to asset managers, who, in the week ended on January 17, became net buyers of the yen for the first time since June 2021.
Dynamics of USDJPY and yen speculative positions
Source: Bloomberg.
The main drivers of USDJPY‘s 17% drop from October’s high were expectations of the Bank of Japan’s monetary policy normalization and high demand for the yen as a safe-haven asset amid falling Treasury yields. However, if in mid-autumn, the recession in the US economy was considered as already a settled matter, and money managers gave out a 98% probability of its occurrence within 12 months, now the latter figure has fallen to 73%. At the same time, 7 out of 9 classes of market assets, according to JP Morgan models, estimate its chances as fifty-fifty. This allows the US Treasury yields to rise and sets back the USDJPY bears.
On the other hand, investors should take into account the normalization of the BoJ monetary policy. Despite the fact that the Bank of Japan made no changes to monetary policy at its January meeting, it added one instrument that hints at concerns about the bond market state. The BoJ also enhanced its loan provision to commercial banks in a bid to encourage them to buy more debt. As a result, BoJ will not increase its market share, as it is already really big.
The central bank’s concerns, coupled with the acceleration of consumer prices to a 41-year high of 4%, amplify the risks of further widening the target yield range or abandoning control over this indicator. When prices are above the 2% target for the 9th report in a row, it is difficult to convince others that high inflation is temporary.
Dynamics of Japan’s inflation
Source: Bloomberg.
Haruhiko Kuroda must have brought the BoJ ultra-easy monetary policy to the verge of normalization, and the next BoJ governor will decide what to do.
Weekly USDJPY trading plan
An improvement in the global economic outlook will lead to the USDJPY short-term consolidation in the range of 127.5-134.2. One could sell on the price rise and buy on the correction down. I also suggest considering longs on AUDJPY and NZDJPY.
Price chart of USDJPY in real time mode
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