You can’t argue against fundamental data.The Japanese government decided otherwise and spent a record amount on USDJPY sales. At first, the pair strongly declined, but then everything returned to normal. What’s next? Let us discuss the Forex outlook and make up a trading plan.
Weekly yen fundamental forecast
The Bank of Japan spent a record ¥2.8 trillion, or $19.7 billion, on currency interventions to support the yen. Although this is less than the ¥3.6 trillion expected by Reuters experts, the figure exceeds the size of the previous intervention in 1998 of ¥2.6 trillion. For almost a quarter of a century, financial markets have changed dramatically. However, the current USDJPY fundamentals do not make the intervention successful.
With $1.3 trillion in foreign reserve assets, $136 billion in deposits and $148 billion in one-year securities, Japan can afford ten more interventions, Bank of America estimates. According to Finance Minister Shunichi Suzuki, Tokyo is prepared to act boldly if the yen continues to fluctuate sharply. It is important that currencies move steadily. This does not mean that USDJPY will be in consolidation for a long time. If its movements depended on the words of one person, hardly anyone would trade such an instrument.
Divergence in the Fed’s monetary policy and the Bank of Japan is still present. Washington is ready to raise the federal funds rate by another 150-175 bps, while Tokyo maintains the country’s ten-year bond yield at 0.25% with unlimited purchases.
Dynamics of Japanese bond yields
Source: Bloomberg.
The BoJ’s September meeting minutes showed that officials still doubt the need to maintain an ultra-easy monetary policy. It was noted that consumer prices could rise significantly compared to the initial scenario due to fluctuations in the exchange rate. The weak yen contributes to accelerating inflation. At the same time, according to Tankan’s survey, inflation expectations in Japan were reduced almost to a minimum. Companies expect CPI growth of 2.6%, 2.1% and 2% in one, three and five years, respectively. The Fed can only dream of such a thing.
USDJPY fundamentals still indicate increased risks of a continuation of the rally. However, investors are frightened by currency intervention and do not intend to show the same speed. Thus, it is unlikely that there will be serious upward movements in the near future, as in August or early September. It is profitable to alternate between purchases and sales. The only reason for the uptrend’s breakout can be a US economy recession.
Weekly USDJPY trading plan
US macro statistics will be the basis for short-term USDJPY fluctuations. PMI and US labor market data for September can rock the boat. In particular, positive employment data will reinforce talk that the US economy is able to withstand a further increase in the federal funds rate. This circumstance makes short-term USDJPY purchases profitable, at least as long as the pair is trading above 144.5.
Price chart of USDJPY in real time mode
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