Yen: volatility is a life saver. Forecast as of 23.11.2021

The Japanese currency is a clear outsider in Forex in 2021. Most likely, it will remain so in 2022. Nevertheless, even those who are lagging are not so easy to break. Let us discuss the Forex outlook and make up a USDJPY trading plan. 

Fundamental Japanese Yen forecast for six months

For some, the USD’s attempt to break above the ¥115 mark looks like madness amid rising volatility in the Forex. For others, the moving of USDJPY from the 110-115 trading range to 115-120 is an objective reality in the context of divergence in economic growth and monetary policy. Time will tell. I would like to note that the first two attempts of the bulls to break out a new level were unsuccessful. The first time they failed to test it. The second try contributed to the update of the 4-year greenback highs. However, the price hasn’t been fixed above level 115.

The more I monitor financial markets, the more I become convinced of the importance of psychology. With a flexible labor market, the Fed will move much faster towards monetary policy normalization than the deflation-oriented ECB. When consumer prices do not reach the target for a long time, it is difficult to convince yourself that today everything has changed. That there’s no turning back. The example of the Bank of Japan is striking. The BoJ has faced low inflation and interest rates for decades, as well as very slow GDP growth.

Haruhiko Kuroda and his colleagues are ready to fill the economy with monetary stimulus until inflation rises to 2%. At present, this looks like an improbable event. Japan loses to other major countries in terms of price growth, which makes us forget about the normalization and growth of local bond yields. Widening spread with US bonds allows Commonwealth Bank of Australia to predict USDJPY will rise to 120.5 by the end of 2022.

Inflation in the world’s largest economies

Source: Financial Times.

Indeed, it is very difficult for the yen buyers to expect a break of the downtrend against the US dollar. The reasons are that the derivatives market is almost sure of an increase in the federal funds rate in June and expects three acts of monetary restrictions by the Fed in 2022. In addition, the Bank of Japan continues to keep local bond yields at the same level.

Why are USDJPY bulls doing so badly? I guess the reason is the uncertainty of the Fed’s monetary policy. No matter how much FOMC officials talk about tapering QE in the first quarter and moving to raise rates in the second, the issue has not been finally resolved. A slowdown in the US economy, the return of a pandemic to the country, or a default due to the debt ceiling can radically change the situation. Uncertainty is the mother of volatility. The growth of the latter is a positive factor for funding currencies such as the yen.

Dynamics of yen volatility


Source: Bloomberg.

USDJPY trading plan for six months

Thus, even though the USDJPY bears’ positions seem hopeless, from the point of view of the most popular investment strategy for raising the rate, the yen buyers can count on other factors, including the volatility growth. I believe that the pair’s corrections will be short-term, allowing them to form and add up to longs in the direction of levels 117 and 119.



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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