Yen’s backup plan. Forecast as of 23.08.2022

Fears of a recession in the US economy have subsided, while the chances of aggressive increase in the federal funds rate have risen. How do these factors affect USDJPY? Let us discuss the forex outlook and make up a trading plan.

Weekly yen fundamental forecast

Every trader should have a backup plan. They can predict the trend reversal correctly and on time, but the situation in the market changes so quickly that a 100% precise trade will eventually bring losses. The hope of a recession allowed me to predict that the USDJPY uptrend would break before the major banks did. However, strong data on the labor market, retail sales and other US indicators, along with an inflation slowdown, reduced the chances of a recession in the US. Expectations for Jerome Powell’s hawkish speech in Jackson Hole boosted treasury yields and brought the idea of ​​a USD growth up to ¥140 back into the market. Is it time for Plan B?

Fundamental analysis is based on economic cycles. When the economy overheats, central banks, led by the Fed, begin to tighten monetary policy to bring inflation down to the 2% target. First, the US dollar is growing, as everyone follows the Fed’s example. The market then realizes that rate hikes can trigger a recession. As a result, investors buy up treasuries and their return on the opposite price falls. As a result, other safe-haven assets, the yen and the franc, benefit.

The USDJPY decline is based on a slowdown in the Fed’s monetary restriction due to concerns about an impending recession in the US. As a result, hedge funds have reduced their net bearish yen trades to their lowest levels since March 2021.

Dynamics of USDJPY and net yen positions

Source: Bloomberg.

The current economic cycle is unique. Inflation is too high. Even in Japan, which has suffered deflation for decades, consumer prices exceeded the target and reached 2.4%. This factor is unlikely to affect the ultra-easy BoJ but is quite significant. Other central banks will continue to raise rates, including the Fed. The yield gap between the US and Japanese bonds may expand even further. This will increase the risks of the continued growth of USDJPY to the level of 140.

Inflation dynamics in Japan

Source: Bloomberg.

Is the yen losing hope again? Since the beginning of the year, it has fallen by more than 19% against the US dollar due to the divergence in monetary policy. Will there be more losses? In my opinion, the higher the Fed raises rates, the higher the chances of deteriorating US macro statistics and recession risks. Most likely, the yen will become popular again. The only question is when?

Weekly USDJPY trading plan

Try to enter short-term USDJPY sales on the rise in the hope that Jerome Powell’s hawkish speech at Jackson Hole has already been priced in the US dollar and US Treasury yields. As a result of the fall in USD and Treasury rates, the pair may consolidate in the ranges of 135-137.5 or 136-138.5.

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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