The second currency intervention of the government and the Bank of Japan over the past month has undoubtedly left its mark. Moreover, its scale has increased. Will it be more effective than the previous one? Let us discuss the Forex outlook and make up a trading plan for USDJPY.
Weekly yen fundamental forecast
Unlike the Bank of England, which calmed the financial markets, the Bank of Japan is doing the opposite. If the BoJ backs away from ultra-easy monetary policy, the global economy could be a disaster. In this regard, currency intervention is a forced but ineffective measure since money is thrown to the wind. However, there is no other way out.
Japan’s debt is 2.5 times higher than its GDP. As long as the BoJ retains control of the yield curve, obligations are performed according to plan. If the regulator abandons the ultra-easy policy, the costs will increase significantly. Investors have already understood the consequences by looking at the UK. However, Japan has a different scale! A tsunami will sweep the world; thus, a global debt crisis will begin before the global recession.
The Bank of Japan has to do its best to keep the yield of 10-year bonds at 0.25%, injecting ¥250 billion. However, this is extremely difficult to do against the backdrop of the close dependence of local and global debt markets. It is worth noting that the main driver of the USDJPY uptrend is the expansion of the gap between the US and Japanese bond yield.
Dynamics of US and Japanese bond yield
Source: Financial Times.
Since the beginning of the year, the pair has grown by almost 30%. When it passed the psychologically important level 150, official Tokyo was inspired to new feats. The second $30 billion currency intervention in the last month sent the USDJPY down over 600 points. However, the yen strengthened after the intervention, and investors took the chance to sell it at a higher price.
Unlike in previous years, the government and the Bank of Japan conduct currency interventions when local markets are closed. Officials understand that external factors are at the heart of the USDJPY rally, and that foreign investors should be fought.
USDJPY dynamics in different Forex sessions
Source: Bloomberg.
Alas, to successfully fight the greenback, coordinated currency intervention is required, including the US, but the Fed will not go for it. Therefore, USDJPY bears can only wait until the federal funds rate finally reaches its ceiling, or when the US economy collapses due to a recession, or when the Bank of Japan abandons ultra-easy monetary policy. So far, all these events are unlikely to happen. This means that the USDJPY uptrend continues.
Weekly USDJPY trading plan
Hold long USDJPY trades entered at the level of 146.5-147. Before the October BoJ meeting, the pair may consolidate due to fears of unpleasant surprises from the central bank. If they do not happen, the rally will continue towards level 154.5.
Price chart of USDJPY in real time mode
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