Over the past month, the yen has appreciated by 6.3% versus the US dollar and could rise higher. The USDJPY bulls are discouraged by the Bank of Japan, whose meeting in January attracts investors’ attention. Let’s talk about this topic and make up a trading plan.
Monthly yen fundamental forecast
With its December decision to widen the target bond yield range, the Bank of Japan stepped forward to monetary normalization. It will not be possible to backstep. The losses are great, but they could be even more if BoJ had waited until the resignation of Haruhiko Kuroda. The sooner, the better. The yen has been up, as well as the Japanese bond yields, but neither of these caused panic in the financial markets and the global crisis. This means that further monetary normalization won’t cause such a shock as was previously expected.
The market has tested the upper limit of the yield range of +/-0.5% on 10-year bonds in the run-up to the meeting of the Bank of Japan on January 17-18, and it looks logical. Although no Bloomberg expert expects monetary policy adjustments, the BoJ is open to surprises. In the meantime, the regulator has bought ¥5 trillion worth of bonds with maturities ranging from 1 to 25 years in an auction on January 13, following a bond purchase worth ¥4.6 trillion a day earlier. In the first case, it is the largest bond purchase in history.
Dynamics of 10-year Japanese bond yield
Source: Financial Times.
If UBS and Nomura agree that the Bank of Japan will refrain from further monetary policy adjustments, then Morgan Stanley MUFG has a different opinion. The company believes that the target yield range will continue to expand because if the yield on 10-year Treasury bonds is close to 3.5%, then the Japanese government bond yield should be above 0.58%. At the same time, serious sales in response to the decision of the BoJ to loosen control are not expected, as hedge funds will begin to take profits on previously opened shorts.
Citigroup believes that the central bank will completely abandon the policy of yield targeting, and Haruhiko Kuroda will thus perform a noble deed. He will save his yet unnamed successor from such a responsible decision. In fact, amid Japan’s inflation accelerating to 4% in December, which is the highest level for the leading national CPI indicator in 41 years, it looks like a necessity.
It doesn’t matter whether the monetary policy in Japan will be normalized in January or a few months later. When the Fed is about to complete the monetary restriction cycle, and the Bank of Japan is just beginning it, USDJPY must continue the downtrend.
Monthly USDJPY trading plan
Over the past month, the yen has strengthened against the US dollar by 6.3% and, since the beginning of the year – by 2.3%. In the first case, the yen is the leader among the G10 currencies, in the second case, it is competing with the Australian dollar. After all, the JPY is a clear favorite in 2023, and the fact that the previously set target for the USDJPY short positions at 127.6 was reached not in a quarter, as previously expected, but in a month, says that investors are willing to buy the yen versus the dollar. It is still relevant to sell the pair on corrections with targets at 124.5 and 121.5.
Price chart of USDJPY in real time mode
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