No matter how strongly Washington and Tokyo may seek to temper USD/JPY bulls, rhetoric alone is unlikely to be enough. Recent comments have encouraged speculators to increase their yen exposure, but without a fundamental shift, the trend could eventually reverse. Let’s examine the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Verbal interventions have temporarily halted the USD/JPY advance.
- Hedge funds have become net buyers of the yen.
- The Fed is tightening monetary policy faster than the Bank of Japan.
- Long positions can be opened if the USD/JPY breaks through 157.85.
Weekly Fundamental Forecast for Yen
It has been a long time since so many officials have warned about the yen’s appreciation. Donald Trump started the rhetoric, which was later echoed by the US and Japanese finance ministers. Prime Minister Sanae Takaichi also faced questions over her stance on Abenomics, while Japan’s top currency diplomat Atsushi Mimura issued further warnings to USD/JPY bulls.
The comments have fueled speculation that authorities could be preparing another coordinated currency intervention with the US. The previous intervention cost approximately $96 billion. Speculators’ reaction triggered a pullback in the USD/JPY from its recent high, while hedge funds have been net buyers of the yen for two consecutive weeks. Their positioning appears sensitive to official rhetoric, whereas asset managers tend to place greater emphasis on underlying fundamentals.
Speculative Positions on Japanese Yen
Source: Bloomberg.
Not all wishes come true—not even those of the world’s most powerful policymakers. Despite Donald Trump’s efforts to push Treasury yields and oil prices lower through public statements, market conditions have moved in the opposite direction. Ten-year Treasury yields are at their highest levels since 2007, while 30-year yields are close to their highest since 2004. Japanese bond yields are also rising, but not as quickly as their US counterparts, a dynamic that weighs on the case for USD/JPY bears.
They had been betting on a more cautious Fed and a faster pace of monetary tightening by the Bank of Japan, expecting carry traders to move away from the yen as a funding currency and repatriate capital. It was not only speculators who embraced this narrative; derivatives markets reflected it as well. The perceived risk of a USD/JPY reversal has fallen to its lowest level since the beginning of the year, while traders are paying more for protection against a decline in the pair than against a rise.
USD/JPY Risk Reversals
Source: Bloomberg.
The US administration’s view that yen appreciation is a concern is understandable. However, the key driver of the USD/JPY rally may lie less in the Bank of Japan’s cautious approach than in expectations that the Fed could accelerate its monetary tightening cycle. The derivatives market indicates a 62% probability of two Fed rate hikes by the end of 2026, while the odds of the federal funds rate reaching 5% within 12 months stand at roughly one in three.
If Donald Trump is going to put pressure on anyone, it should be the Federal Reserve, not the Japanese government. However, the US president has so far been reluctant to do so with regard to Kevin Warsh.
Weekly USDJPY Trading Plan
The absence of near-term currency intervention could ease speculators’ concerns and encourage renewed buying of the USD/JPY. Meanwhile, a break above the 157.85 resistance level could provide an opportunity to add to existing 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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