For a long time, markets saw Haruhiko Kuroda’s retirement as a signal of a soon monetary tightening start. What if the new BoJ governor is even more dovish? Where will USDJPY go then? Let us discuss the Forex outlook and make up a trading plan.
Weekly yen fundamental forecast
What happened twice will surely happen a third time. The Japanese Ministry of Finance reported ¥6.35 trillion worth of foreign exchange interventions, equivalent to $48 billion, in October, said they had paid off and did not rule out a repeat in the future. In total, the central bank, working closely with the government, has spent more than ¥9 trillion to send the USDJPY down from 32-year highs. And although the previous BoJ FX intervention is dated 1998, two cases have already taken place. Is the third coming?
Yen reaction to Forex interventions
Source: Bloomberg.
In fact, Japan does not need foreign exchange interventions today. The yen is already moving steadily, reflecting the economic fundamentals, which is required by official Tokyo. Investors are again focused on monetary policy, which supports the USDJPY bulls.
Following a strong report on US employment and Atlanta Fed Bostic’s hawkish comments, the derivatives market bets on the federal funds rate’s growth to 5.25% or even 5.5%. The US dollar is naturally supported.
If the reports are correct and Masayoshi Amamiya becomes the next Bank of Japan governor, market participants say it would be bullish for bonds and weigh on the yen and local financial stocks. Amamiya is thought to be a dove, and his becoming the BoJ governor will reassure investors in maintaining the ultra-easy monetary policy. The target range for the bond yield will hardly be further broadened, just like any rate hikes.
On the other hand, if the monetary policy depends on the domestic data and Japanese inflation is proven to remain at elevated levels, no doves will stop the BoJ monetary tightening. The rise in nominal income growth to 4.8% in December, which is much higher Bloomberg forecast, is a bearish factor for the USDJPY. I don’t think that based on a single report, BoJ will make further adjustments to monetary policy. According to Haruhiko Kuroda, wage increases of 3% or more must be sustained for high prices to anchor.
Dynamics of earnings in Japan
Source: Bloomberg.
The further USDJPY trend will depend on Jerome Powell’s stance. Investors are looking forward to his speech. I don’t think the Fed Chair will encourage investors. If there are suggestions about a potentially higher interest rate than FOMC December forecasts, the US stock indexes will drop, while the Treasury yield will rise, strengthening the US dollar.
Weekly USDJPY trading plan
Thus, the USDJPY longs entered at 129.1 yielded profits. Considering the suggestion about consolidation in the range of 127.5-134.2, the rally can well continue. It is relevant to hold up longs and add up to them from time to time.
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.