What is more important for the government and the Bank of Japan, the yen’s exchange rate or the speed of its change? Judging by the decline in USDJPY volatility, it is the speed. However, a repeated intervention in Forex is still possible. Let us discuss the Forex outlook and make up a trading plan.
Weekly yen fundamental forecast
Although USDJPY closely approached the level of 145.9, at which Japanese officials initiated a $20 billion intervention, traders are in no hurry to exit long trades. The fall in the yen’s weekly implied volatility indicates that investors are not too scared. They believe that too fast movements of the yen are important for the government and the central bank, and not a specific level. Most likely, the effect of interventions will be less than at the end of September.
By the end of September, Japan’s gold and foreign exchange reserves decreased by a record $54 billion, including by almost $20 billion due to foreign exchange intervention. The rest of the losses were associated with a decrease in the market value of foreign securities. This also affects the yield of treasuries, which grows as prices decrease. Curiously, negative-yielding global debt, which was above $18 trillion at the end of 2020, has now fallen below $2 trillion. Most of the global debt is Japanese liabilities. This fact explains the current USDJPY uptrend.
Dynamics of global debt with negative yield
Source: Financial Times.
When the Fed raises rates, it drives up US Treasury yields. At the same time, the Bank of Japan keeps bond rates low, which contributes to the flow of capital from Asia to North America and the strengthening of the US dollar against the yen.
According to the consensus forecast of Reuters experts, USDJPY will be near 144 at the end of December, which is equivalent to a 20% decline since the beginning of the year, the biggest since 1970. In six months, the pair could reach the level of 140.5, and in a year the level of 135.
Several major banks have opposing views on the future of the yen. Morgan Stanley expects level 150 during 2023. Commonwealth Bank of Australia forecasts a decline to level 137 by the end of next year as the federal funds rate has a ceiling of 4.5%. It is unlikely that the Fed will raise it higher, so the USDJPY uptrend should end.
A recession in the US economy is required for the trend reversal. In this case, the yield on Treasury bonds will start to fall. Judging by the US employment data for September, the decline will not start soon. This means that the dollar can strengthen against the yen, regardless of the intervention.
Dynamics of USDJPY and gold reserves of Japan
Source: Bloomberg.
Weekly USDJPY trading plan
Investors are still afraid, although they do not want to show it. In this regard, when the price approaches the level of 145.9, it makes sense to take a part of the profit on previously formed longs. Use the USDJPY drop below 144.5-144.6 followed by a return above this level for entering purchases.
Price chart of USDJPY in real time mode
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