US Treasury Secretary Scott Bessent’s remarks on the outlook for monetary policy were indeed noteworthy. However, Fed Chair Jerome Powell and Bank of Japan Governor Kazuo Ueda established the USDJPY rate at Jackson Hole. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed intends to resume its monetary expansion cycle.
- The Bank of Japan will raise its overnight rate.
- Capital inflows are strengthening the yen.
- Selling the USDJPY pair with the targets of 145 and 140.5 is relevant.
Weekly Fundamental Forecast for Yen
The words of central bank chiefs carry significant weight, and markets tend to pay close attention to them. At the Jackson Hole symposium, Jerome Powell and Kazuo Ueda articulated the view that the USDJPY exchange rate should decline. The Fed chairman alluded to a protracted cycle of monetary policy easing, while Kazuo Ueda indicated that the overnight rate would rise. This divergence, along with capital inflows into the Japanese securities market, supports the strategy of purchasing the yen against the US dollar.
In his recent speech in Jackson Hole, Jerome Powell outlined a strategy that would enable the Fed to ease monetary policy by nearly 100 basis points over the next 12 months. This aligns with the expectations of the derivatives market. Weak employment growth is cooling domestic demand and leading to lower prices, offsetting the surge in inflation triggered by tariffs.
Inflation in US, Eurozone, and Japan
Source: Bloomberg.
Kazuo Ueda has observed that wage growth in Japan is expanding from large to medium and small enterprises. The labor market is expected to remain strong and continue to exert upward pressure on wages, barring any shocks to demand. This kind of rhetoric can be called hawkish. The derivatives market shows a 50% probability of an overnight rate increase in October, up from 42% at the end of July.
USDJPY bears have several advantages, and divergence in monetary policy is one of them. Foreign investors are currently showing record demand for Japanese securities. Between January and July, purchases of long-term bonds in Japan amounted to ¥9.3 trillion, the highest figure for the first half of the year since records began in 2004. This winning streak has continued for seven months, notching the longest period since 2022.
In the week ending August 15, foreign investors purchased ¥1.75 trillion worth of Japanese stocks on a net basis in the spot and derivatives market, posting the highest figure since November 2014.
Foreign Investors’ Investments in Japanese Stocks
Source: Bloomberg.
The diversification of investment portfolios in favor of European and Japanese securities is an important driver of the EURUSD pair rally and the decline of the USDJPY pair. The yen’s success could have come earlier if the market had not had doubts about the US dollar’s sales strategy before the Jackson Hole event. In the first half of the year, the USD index fell by 10% and seemed oversold amid mixed US economic data and Fed caution.
Weekly USDJPY Trading Plan
As soon as this caution disappeared, USDJPY bulls fled the market. The likelihood of the downtrend resuming is high. Therefore, short trades on the currency pair can be considered with targets at 145 and 141.5. The primary risks for the yen are the accelerating US inflation and the strengthening US labor market.
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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