The divergence in monetary policy, coupled with the yen’s increased demand for safe-haven assets and heightened volatility, has strengthened the Japanese currency. These bearish factors are pushing the USDJPY pair down. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan’s pause in policy normalization has boosted the yen.
- Increased volatility on Forex is a reason to close carry trade transactions.
- The US dollar has lost its status as a safe haven.
- Short trades on the USDJPY pair can be formed with the target at 130 and 125.
Yearly Fundamental Forecast for Yen
Investors were alarmed by an article in The Wall Street Journal and then by the statement of Kevin Hassett, Director of the National Economic Council, that Donald Trump was seriously considering firing Jerome Powell. In the Forex market, rumors are circulating that the US President’s actions do not target the Fed chief, but rather aim to weaken the US dollar due to declining confidence in the Fed’s autonomy. Against this backdrop, the USDJPY pair may decline further.
Donald Trump’s policies have created a challenging situation for the Bank of Japan. Accelerating inflation enables the Japanese regulator to proceed with monetary policy tightening. However, an increase in the overnight rate accelerates the strengthening of the yen, increasing demand for it as a safe-haven asset. As expected, speculators have increased their net-long positions in the Japanese currency, reaching record highs.
Hedge Funds and Asset Managers’ Speculative Positions on Japanese Yen
Source: Bloomberg.
A revaluation would reduce import prices and eventually slow inflation. Therefore, Tokyo’s return to currency interventions would be a reasonable solution. However, in such a case, Japan will likely be blacklisted as a currency manipulator, which could have serious consequences. Against this backdrop, Japan’s primary objective is to persuade the US to cancel the 24% tariffs by committing to increased purchases of US rice and soybeans. At the same time, the US is insisting on including meat, seafood, and potatoes in the list.
The issue of exchange rates has not yet been raised, but it is certain to come up. If Washington continues to weaken the US dollar, the decline in the USDJPY pair will accelerate. This is consistent with the reduced risks associated with the pair reversal, as indicated by market analysis. Mizuho Securities predicts that the greenback will likely decline to 133, while Nomura Securities anticipates the US currency to slide to 137.5 against the yen.
Yen’s Implied Volatility and USDJPY Performance
Source: Bloomberg.
The Bank of Japan has to pause the normalization cycle until further clarity emerges regarding the ongoing negotiations between Washington and Tokyo. However, even if the overnight rate remains at the same level, the yen is likely to strengthen in the context of monetary expansion by other central banks. In order to mitigate the negative impact of trade wars on their economies, they will be forced to resort to this measure.
Along with the high demand for the Japanese currency as a safe-haven asset and the divergence in monetary policy between the BoJ and other regulators, including the Fed, USDJPY bears are supported by high volatility. In such an environment, the yen cannot be used as a funding currency in carry trades. Thus, the withdrawal of these trades contributes to its strengthening.
Yearly USDJPY Trading Plan
In light of the current economic environment, the USDJPY pair may drop below the previously set targets of 140 and 135. The US administration’s intention to weaken the US dollar will likely result in a decline to 130 and 125. Therefore, short trades can be considered and kept open.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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