The potential for a 29% USDJPY rally since the beginning of the year is still untapped. Only currency interventions can stop the pair’s growth. Let us discuss the Forex outlook and make up a trading plan.
Weekly yen fundamental forecast
While the Bank of England is tightening monetary policy, and the Liz Truss government is about to introduce a fiscal stimulus, Japan is doing the opposite. The BoJ will not give up yield curve control and ultra-low interest rates, while the Ministry of Finance is tough on the rapidly falling yen. In such conditions, the pound managed to stabilize, while USDJPY bears only dream of improving the situation.
Japanese officials made contrary statements at a meeting of central bankers and G20 finance ministers. Haruhiko Kuroda insisted that high inflation in Japan is temporary, and by the end of the year, it will fall below the target of 2%, so the Bank of Japan will not abandon the ultra-easy monetary policy. According to Finance Minister Shunichi Suzuki, the government cannot tolerate excessive USDJPY fluctuations caused by speculation. Although exchange rates are determined by the market, they have an impact on inflation, foreign trade and the economy as a whole. In this regard, it is important to be on alert.
It’s hard not to get angry when the massive ¥2.84 trillion currency intervention fails. The dollar is trading near 32-year highs against the yen, and investors wonder when Japanese officials will start another currency intervention. This will happen either when USDJPY reaches the psychologically important level of 150 or after the volatility increases. It is currently lower than during previous yen purchases, and the government has repeatedly noted that it is concerned about movements, not specific levels.
Dynamics of yen volatility
Source: Bloomberg.
Despite a 29% USDJPY rally since the beginning of the year, its potential has not been tapped. Barclays believes that the federal funds rate in 2023 will be in the range of 5 to 5.25%. This suggests further growth in US Treasury yields, a widening gap with Japanese counterparts, and a USD strengthening against the yen due to the flow of capital into more attractive assets from Asia to North America. When inflation in the US is near a 40-year high, it’s clear the Fed’s job is far from done.
The Japanese government has shown that it does not waste words. It has already used currency intervention and is able to repeat this a second time. At the same time, the effect of the intervention will be less. In September, the USDJPY fell by more than 500 points. Expect it to collapse by 300-350 in October, after which new purchases will begin.
Weekly USDJPY trading plan
For the first time, we successfully used the pair’s decline to form longs. Let’s try to do it again. If intervention starts at level 149, buy USDJPY on a correction to 145.5-146. If the government decides to start intervention at level 150, enter long trades in the zone of 146.5-147.
Price chart of USDJPY in real time mode
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