Yen’s future is not so bright. Forecast as of 01.11.2021

Divergences in economic growth and monetary policy of the Fed and the Bank of Japan are not the only drivers of USDJPY growth. The status of the safe-haven asset and the funding currency is putting pressure on the yen. Let us discuss the Forex outlook and make up a trading plan.

Monthly Japanese yen fundamental forecast 

The fact that Fumio Kishida’s Liberal Democratic Party, contrary to expectations, won a strong majority in the parliamentary elections did not support the USDJPY bears. As a rule, the decrease in political uncertainty plays into the hands of the national currency, but the Japanese yen was so weak in October that it was once again sold off as a safe haven asset.

The yen has a lot of problems with its status as a funding currency. Over the past two months, the Bloomberg Cumulative FX Carry Trade Index, which tracks the profits of the three top-performing G10 currencies versus the three lowest, has risen by 3.6%. Since the beginning of the year, the index has grown by 8%, which is the best dynamics since 2016. Obviously, the Japanese yen was among the outsiders.

Dynamics of carry trade efficiency

Source: Bloomberg.

The reason for such success of competitors is rumors about the monetary policy normalization. So far, the Bank of Japan cannot even dream of this. At its most recent meeting, the BoJ lowered its 2021 inflation forecast from 0.6% to 0%, suggesting its long-term commitment to monetary expansion. According to Haruhiko Kuroda, there is a small chance that consumer prices in Japan will accelerate as Tokyo maintains its stimulus and other central banks cut it. According to the BoJ head, the weakening of the yen had a positive effect on the economy.

BoJ lowered forecasts not only for inflation but also for GDP. It should be noted that according to Bloomberg experts surveys, the Japanese economy will expand the slowest among the G7 countries.

Dynamics of the G7 economies

  

Source: Bloomberg.

Thus, the decrease of political uncertainty, the sell-off of funding currencies as part of the growing interest in carry trade, divergence in monetary policy and economic growth, suggest that the upward USDJPY trend is stable. The pair continues to rise even amid a pullback in 10-year US Treasury yields. Rates on 2-year securities sensitive to the Fed’s monetary policy continue to rise. This is because the derivatives market expects the first increase in the federal funds rate by July 2022 with a probability of 77% and by September 2022 with a probability of 89%. A month ago, the figures were 15% and 27%, respectively.

Monthly USDJPY trading plan

In my opinion, the yen’s failures in 2021 are nothing compared to what will happen next year. According to Goldman Sachs, inflation in the US will grow by 4% or more even by the end of the QE. Amid an improvement in the epidemiological situation, the labor market will be able to recover faster than expected, which will push the Fed towards aggressive monetary restriction. As a result, the US dollar will continue to strengthen against currencies whose issuing central banks adhere to ultra-easy monetary policy. This circumstance allows continuing USDJPY purchases with targets at 115.5 and 117. Hold and add up to long trades entered on correction at levels 113.2 and 113.8.

    

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 LiteForex. 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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