Yen is at the crossroads. Forecast as of 17.11.2021

The weakening of the yen against the US dollar to the lowest levels for more than four years looks logical. There are significant differences in the economy and monetary policy of the United States and Japan. What’s in store for USDJPY? Let us discuss the Forex outlook and make up a trading plan.

Fundamental Japanese Yen forecast for six months

In Forex, as in life, there are random events, and there are logical ones. The rise of USDJPY to the maximum levels since March 2017 is logical. Different ways for the recovery of the US and Japanese economies and different views of central banks on monetary policy are sure signs of the yen’s weakness. The JPY has lost more than 10% of its value against the USD since the beginning of the year.

The 3% QoQ drop in Japan’s GDP in the third quarter upset not only Bloomberg experts, who predict a slower economic contraction of 0.7%, but also Haruhiko Kuroda. The Governor of the Bank of Japan immediately announced that he was not going to copy others. He doesn’t care if most central banks normalize or intend to normalize monetary policy. Until the 2% inflation target is reached, BoJ intends to use existing monetary incentives and add new ones.

Dynamics of Japan’s GDP

  

Source: Bloomberg.

The BoJ’s views are fundamentally different from those of the Fed. The US regulator is going to end QE within eight months and start raising the federal funds rate in the second half of 2022. At the same time, the derivatives market expects two or three acts of monetary restriction next year, while St. Louis Fed President James Bullard calls on the central bank to act more aggressively. Otherwise, the Fed may lose control over inflation.

Divergence in monetary policy contributes to the widening of the yield spreads for the US and Japanese bonds. This leads to an overflow of capital from Asia to North America and an increase in the USDJPY price.

Dynamics of USDJPY and differential of US and Japanese bond yields

   

Source: Bloomberg.

The USDJPY has closely approached the psychologically important level of 115, and different banks and investment companies have opposite views on the pair’s further trend. JP Morgan doesn’t believe the USDJPY will continue growing on the federal funds rate hike expectations, as the Fed will hardly raise the rates more than twice in 2022. Level 115 has been a barrier for both bulls and bears for a long time, so the price will hardly break it out easily.

Conversely, Daiwa Securities notes the US dollar uptrend is strong, and the breakout of level 115 will move the pair to a new trading range. Furthermore, the demand for greenback will increase with the price rise. In general, most large banks and investment companies are bullish on the USDJPY. UBS, HSBC, Bank of America, and Invesco Investment recommend their clients to buy the pair.

USDJPY trading plan for six months

I don’t think the USDJPY trend will radically change in the next 6-12 months. High inflation in the US will encourage the Fed to tighten monetary policy aggressively, while the Bank of Japan is likely to maintain its ultra-easy monetary policy for a long time. Therefore, I suggest the US dollar should be rising against the Japanese yen to 117 and 119. Hold long trades entered at 113.3 and 113.7 and add up to them on the corrections. 

   

 

 

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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