Yen panics because of politics. Forecast as of 21.12.2021

The Japanese yen strengthens despite the BoJ’s unwillingness to normalize monetary policy. What encourages the USDJPY bears?  Let us discuss the Forex outlook and make up a trading plan.

Monthly yen fundamental analysis

Any trend, no matter how strong, can’t last indefinitely. Markets need corrections, which influence the movements of currencies’ prices. And the contrasts look impressive sometimes. In early 2021, the yen was the G10 outsider; but it has been the best performer since October. Worried that the omicron and the Fed’s monetary tightening would lead to a serious slowdown in global GDP, investors have reduced their net short positions in the yen for six consecutive weeks, bringing them to 23,000 contracts. This has been the lowest rate since March.

USDJPY and yen speculative positions

Source: Bloomberg

If the yen didn’t attract investors as a safe haven, it would be much weaker. Unlike the Fed and the Bank of England, which have embarked on a course of tightening monetary policy, the Bank of Japan, on the contrary, retained most of the stimulus at its December meeting. The Japanese central bank intends to continue targeting the 10-year local bond yield at 0.1% and provide small and medium-sized companies with cheap loans.

According to Haruhiko Kuroda, despite the risks of rising prices, the chance that inflation will reach 2% and rise higher, as in the United States and Europe, is small. The head of the central bank does not think that the BoJ will take the path of normalizing monetary policy. He doesn’t express any concerns about the growth of the BoJ balance sheet to 135% of GDP. For comparison, the same indicator for the Fed is 36%, for the ECB – 66%.

Dynamics of inflation in USA, euro area and Japan

Source: Bloomberg

Yes, the divergence in monetary policies is a key driver for Forex pricing, but the case with the yen is a bit different. Investors are worried that aggressive rate hikes by the world’s largest central banks will press down the global economy. Therefore, they buy the US Treasuries, pressing down their yield and supporting the USDJPY bears.

The same is true for the omicron. Investors remember how lockdowns turned down the global GDP growth, so they are willing to buy safe-haven assets. At the same time, the ECB and other central banks acknowledge that with each new strain of COVID-19, the impact of the pandemic on the economy is easing. Vaccination rates are rising, and people are adapting. Furthermore, the GSP rates featured in 2020-2021 are abnormally high and will return to the norm later.

Monthly USDJPY trading plan

Thus, the panic over the global economic downturn is a temporary phenomenon. Uncertainty is pushing investors to cut net yen shorts by the end of the year, as it did amid the trade wars at the end of 2018. However, in early 2019, the yen sellers returned to the market. I suppose something like this should occur in early 2022. As long as the pair is consolidating in the range of 113.2 – 114.2, one should not take active action. But a breakout of its upper border can serve as a reason to buy the USDJPY with targets at 115.2 and 116.7.

   

 

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 LiteFinance. 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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