While the markets speculate that, without proactive measures from the Bank of Japan, the yen will be unable to sustain the gains it has made through currency interventions, speculators are reducing their net short positions. Let’s discuss this topic and develop a trading plan for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- The US and Japanese economies are slowing down.
- The BoJ’s overnight rate could rise to 2.25–2.5%.
- Hedge funds have halved their net short positions in the yen.
- Long positions on the USD/JPY can be opened if the pair breaks through 159.5.
Weekly Fundamental Forecast for Yen
There is nothing better than having someone else do your work—even if it initially required participating in currency interventions. Japan is finally on the verge of breaking the uptrend in the USD/JPY. Notably, this is happening not because of coordinated Forex intervention with the US, but because the US dollar is weakening.
A strong economy typically supports a strong currency. For a long time, the US economy appeared remarkably resilient, bolstered by massive AI investments, fiscal stimulus, productivity gains, and the wealth effect. Now, however, cracks are beginning to emerge. Employment and retail sales are weakening, pointing to softer domestic demand. The downward trend in inflation and the first decline in the consumer sentiment index in several months further suggest the US economy is losing momentum.
Japan’s GDP Growth
Source: Bloomberg.
Japan’s GDP disappointed in the second quarter, which, in theory, should make the BoJ more cautious about tightening monetary policy. The bigger issue is the challenge to American exceptionalism, while the Japanese economy has continued to grow for a third consecutive quarter. At the same time, speculation that Sanae Takaichi’s government will not stand in the central bank’s way of raising rates has pushed the odds of monetary tightening by September to 80%. Derivatives markets have already priced in an overnight rate increase to 1.25% by October.
In fact, the Bank of Japan could afford to tighten monetary policy much more aggressively, potentially raising borrowing costs to 2.25–2.5% while inflation remains around 2%. Real interest rates are still negative, unlike in most other developed economies. This is putting considerable pressure on the yen and contributing to massive yen selling in carry-trade operations, where the currency serves as a funding source. For arbitrage traders, the situation is particularly attractive: currency interventions have created an opportunity to sell the yen at a higher price.
Speculative Positions on Japanese Yen
Source: Bloomberg.
Speculators are a different story. Sensing trouble ahead, they have halved their net short positions in the yen since the coordinated intervention in the Forex market. Now, with the US dollar weakening, hedge funds are thinking twice about buying the USD/JPY.
In fact, Washington has an interest in seeing the pair decline on its own. The US does not want Japan to sell Treasuries to finance currency interventions. A BoJ rate hike is not an ideal solution either. Higher Japanese rates would make local bonds more attractive, potentially encouraging capital to flow from North America to Asia. In this case, how would the US finance its colossal debt?
Weekly USDJPY Trading Plan
The USD/JPY pair’s trajectory will largely depend on how long the US dollar’s weakness persists. A sustained break above the 159.5 resistance level would offer a buy signal.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. 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 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
