Japanese investors’ high demand for US stocks used to limit the potential of the yen’s consolidation. In 2020, much has changed, though. How will that affect the USDJPY? Let’s discuss that and make a trading plan.

Monthly fundamental forecast for yen

The Japanese yen has been slowly consolidating for a few past years, making me think that we are living in turbulent times. 

Trade wars, pandemic, and recession maintain high demand for safe-haven assets. So, it’s not surprising that the USDJPY have fallen almost by 8% in the past three years. It’s the second-best result among the G10 currencies after the franc. Also, there’s a substantial gap between the yen and the third-ranking euro, with its +1.8%. 

The yen has played the role of the main safe-haven asset for a long time. It felt confident amid its proximity to China and China’s problems related to the trade war. USDJPY bears’ most vulnerable spots were the BoJ’s ultra-soft monetary policy and capital outflows amid the local assets’ low investment appeal. In 2020, the situation went the other way round: the Fed’s sharp cut of the federal funds rate allowed the dollar to reclaim its status of the most reliable asset, while the global market’s yield fall results in the Japanese money repatriation and the yen’s consolidation. 

The high correlation between the USDJPY and the S&P 500 used to be due to Japanese residents’ unhedged buying of US stocks. The local debt market’s rates were low or negative, the Nikkei 225’s investment appeal was doubtful, and hedging costs were high. As a result, Japanese insurance companies and pension funds led by Government Pension Investment Fund, or GPIF, were looking for investment opportunities outside the country. A large fiscal stimulus flattens out bond yields worldwide, drops the cost of foreign currency hedging to the 5-year bottom, and makes hedging conditional on implied volatility’s exceeding its historic analog. 

USDJPY’s volatility

Source: Bloomberg.

So, Japanese investors would buy American stocks without hedging risks, but now they’ve got such an opportunity. That lowers the pair’s correlation with the S&P 500 and doesn’t allow speaking about the yen’s weakness in the economic recovery period. 

Capital flows are now directed to Asia. It’s not only about flatter yields but also about the growth in demand for Japanese stocks. In the week ended 9 November, non-residents invested ¥1.42 trillion in Japanese shares, which is the highest value over the past 18 months. They may have been influenced by Warren Buffet’s intention to buy local retailers’ securities, or by high demand for mergers and a low share of foreigners in the market structure. 

Foreign investors’ investment in Japanese stocks

Source: Bloomberg.

Monthly trading plan for USDJPY 

Add here GPIF’s limit on foreign assets buying, and we’ll see that capital flows are reversing in Asia’s direction. That circumstance allows me to sell the USDJPY with targets at 103 and 102 if Joe Biden wins the US presidential election, which will most likely weaken the USD.

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