The Bank of Japan has been an odd one out for a long time, choosing not to tighten policy amidst mass rate hikes. Now, other central banks are ready to pause, too. How will that affect the USDJPY? Let’s discuss it and make a trading plan.
Weekly fundamental forecast for yen
While the Fed is switching from war to peace, agreeing that the market can have a different opinion, a pause in military actions between the Bank of Japan and the market seems too long. The USDJPY has traded in the consolidation range outlined earlier for nearly two weeks, and investors now doubt the bears will manage to revive a downtrend. Haruhiko Kuroda and his team persuaded the market of their commitment to an ultra-soft monetary policy. That indicates limited prospects for the yen’s consolidation against the US dollar as the Fed is about to pause tightening. However, the yen has many other trumps.
BoJ’s deputy governor Masazumi Wakatabe says no amendments are coming in February-March. The increase of the target yield range in December aimed at boosting the flexibility of ultra-soft monetary policy, which won’t be given up or normalized. Wakatabe’s comments align with Kuroda’s position, who doesn’t seem to care about an inflation surge to the highest levels in the past 40 years. The Central Bank Head is sure that wages must grow to 3% to fix prices at a high level. But that’s been just a dream so far.
Wages in Japan
Source: Bloomberg.
Thus, the Japanese functionaries appear to have made the market believe it’s engaged in wishful thinking. The BoJ will hardly correct its policy until Haruhiko Kuroda steps down in April. Talking about normalization is too early, and that deprives the yen of one of its trumps that made the USDJPY collapse by 15% from October’s highs.
The other trump doesn’t look helpful either. Even if the largest group of 835 institutional investors surveyed by JP Morgan called a recession the main problem of 2023, the IMF doesn’t consider that scenario as basic. The yen is a protective asset growing on recession expectations. If there’s no recession and the divergence between the Fed’s and BoJ’s policy is just a myth, why sell the USDJPY?
Actually, there are some reasons. The same IMF forecasts that Japan’s economy will accelerate from 1.4% to 1.8% in 2023 and outrun the US GDP in terms of growth pace. Moreover, a drop in expected peaks of the ECB’s, Bank of England’s, and other central banks’ rates will result in closing longs in EURJPY and GBPJPY, which will heat the interest in the yen.
US employment rate
Source: Bloomberg.
Weekly trading plan for USDJPY
Will the USDJPY continue trading in the consolidation range? I don’t see any reason for going out of the range. A US labor market report for January will hardly help the antagonists. Bad news will also be bad for the market because it will raise the chance of a recession. The dollar will strengthen amid the S&P 500‘s fall, and the yen — amid falling treasury yields. So, use the pair’s return to above 129.1 or a failure to test support at 128 to open longs.
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.