Yen: from rags to riches. Forecast as of 10.11.2021

When the central bank hints at a rate hike but doesn’t take action, falling bond yields could affect the entire global debt market. How will this affect USDJPY? Let us discuss the Forex outlook and make up a trading plan.

Weekly yen fundamental analysis

The accelerating inflation and the decision of central banks to remain passive when it comes to raising interest rates effectively strengthen monetary stimulus. Even though many countries do not need it, since they have fully recovered from the pandemic or are on the verge of it. Negative real rates in the US are higher than in Japan, which raises a question, is the yen too cheap compared to the greenback? Is the current USDJPY correction the first sign of the uptrend reversal?

Real interest rates in the world

Source: Financial Times.

Indeed, the rise in inflation expectations in the US to record levels and the fall in the nominal yield of US Treasuries instantly turned the yen from a clear G10 outsider since the beginning of the year into the leader of November. In this case, real rates on US debt are falling, which reduces the attractiveness of the carry trade and forces investors to return to funding currencies, including the yen.

The problem is that the fall in Treasury yields is due to external factors. In particular, the RBA’s intention to keep the cash rate at the current level until 2024 and the Bank of England’s refusal to raise the interest rate led to a sharp decline in the yield of not only Australian and British, but also US bonds. Thus, small central banks dictate their will to the huge US debt market and at the same time offer aid to USDJPY bears.

Dynamics of USDJPY and US Treasury bond yields

Source: Bloomberg.

The rapid pullback of the pair is due, among other things, to exiting of the excessively inflated speculative net shorts on the yen, which are at their highest levels since January 2019. It is also necessary to take into account that large-scale fiscal stimulus led to an increase in excess savings of Americans by $2.6 trillion. This money flows into the securities market, which contributes to higher prices and lower Treasury yields. Curiously, according to a joint study by Harvard University and the University of Chicago Booth School of Business, every dollar invested in stocks from the outside increases the market capitalization by $5. This explains why stock indices rise rapidly under the influence of massive stimulus, while bond yields are not growing.

Weekly USDJPY trading plan

A recession-free economy is demanding higher interest rates. Moreover, inflation is accelerating to its highest levels in decades, and labor markets are rapidly recovering. Even though the Bank of England did not tighten monetary policy in November, it will do so sooner or later. The Reserve Bank of Australia and the ECB still adhere to the mantra that the first rate hike will occur in 2024, but things will probably be different in reality. The Fed may resort to monetary restriction in 2022 two or three times. All this indicates that the profitability of the global debt market will grow and gives grounds to enter USDJPY purchases if the pair returns above 113.3 and 113.7.

  

 

 

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 LiteForex. 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.

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