As paradoxical as it may sound, joint intervention by the US and Japan has brought the USD/JPY back to its fundamentals. The pair’s movements now depend less on speculative positioning and more on the monetary policies of the Fed and the BoJ. Let’s examine the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The market is almost certain that the BoJ will raise interest rates in September.
- Market sentiment has shifted since the currency interventions.
- Speculators are in no rush to rebuild short positions on the yen.
- Short positions can be considered as long as the USD/JPY trades below 159.5.
Weekly Fundamental Forecast for Yen
While markets are taking a breather ahead of this week’s three key events—the release of US PCE data, NVIDIA’s earnings report, and the central bank governors’ meeting in Jackson Hole—the yen has stabilized. For the USD/JPY, not only Kevin Warsh’s speech but also Kazuo Ueda’s remarks will be crucial. Investors will look for clues on whether market expectations of a September rate hike by the BoJ have become too aggressive.
Markets and central banks are always engaged in the same game. Investors assess policymakers’ likely actions, and when expectations prove wrong, the resulting repricing can trigger significant moves in financial markets. Following the BoJ Policy Board’s July meeting, the probability of a September rate hike jumped from 23% to 82%, driven by hawkish comments from policymakers and accelerating inflation in Japan. Year-on-year growth in consumer prices excluding fresh food rose from 1.6% to 1.8% in July, marking the fastest pace of growth since January.
Japan’s Inflation Rate
Source: Bloomberg.
Prior to the coordinated currency intervention by Washington and Tokyo, the main drivers behind the USDJPY rally toward 40-year highs were the Bank of Japan’s sluggish policy response, the Fed’s willingness to maintain a hawkish stance, and rising energy prices, which were weighing on the Japanese economy. By the end of August, however, market sentiment had shifted.
Markets have scaled back expectations for Fed tightening and no longer anticipate a rate hike in September. By contrast, the probability of the BoJ raising its policy rate from 1% to 1.25% in early autumn is above 80%. Oil prices are also swinging sharply as the conflict in the Middle East alternates between escalation and de-escalation. All of this suggests that the USD/JPY is unlikely to return to 164. The US dollar is not as strong, and the yen is not as weak, as they were before.
Speculators appear to be recognizing this and are gradually unwinding their short yen positions. At first glance, this may seem to be a direct consequence of the currency intervention. In reality, however, the intervention by Washington and Tokyo merely set the process in motion. In previous instances, USD/JPY bulls returned within a couple of weeks. This time, that has not happened yet.
USD/JPY Rate and Speculative Positions on Japanese Yen
Source: Bloomberg.
Thus, it may sound somewhat weird, but the coordinated currency intervention has brought the yen back in line with its fundamentals. The trajectory of USD/JPY quotes now depends less on speculators’ willingness to test the authorities’ resolve and more on the monetary policies of the Fed and the BoJ.
Weekly USDJPY Trading Plan
It is time to admit that another intervention in the Forex market is highly unlikely. As long as the USD/JPY remains below 159.5, the focus should remain on selling. If price pierces 159.5, consider long positions.
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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