The safe-haven status in times of market turmoil allows the yen to feel confident. Moreover, thanks to cross-currency swaps, money flows from America and Europe to Asia. Let us discuss the Forex outlook and make up a USDJPY trading plan

Weekly yen fundamental analysis

When will USDJPY bears stop being heroic? The currency, whose issuing country is facing new emergencies due to COVID-19, whose economy is slowing and losing more and more to the US one, and the central bank officials does not think about monetary policy normalization, is the leader among the G10 in July. Is it a paradox? In fact, in Forex, many things initially look extraordinary, but there is a logical explanation for everything.

Monetary policy and economic growth can provide excellent reasons for long-term investment. However, you need to understand that exchange rates are determined by the capital flow. If it flows from America and Europe to Asia, then USDJPY and EURJPY prices will most likely fall. In early 2021, investors were counting on reflation. Rapid economic growth in the United States and the Fed’s passivity allowed investors to sell Treasuries in the hope of a yield rally. In June, the Fed gave up its wait-and-see approach as new strains of COVID-19 raised doubts about the possibility of a skyrocketing US GDP. As a result, the US Treasury bonds’ short trades began to close, and yields began to fall.

The main beneficiary was the Japanese yen, which faced both repatriation of capital to its homeland from local investors and the growing demand for Japanese bonds from foreign investors. How can the often negative rates on Japanese debt attract Americans? The answer is simple! They make money on cross-currency swaps. They allow you to get 50 bps more compared to European and Australian bonds with similar maturities. The difference with Treasuries is about 30 bps. Is it any surprise that in June foreign investors bought ¥4.06 trillion of Japanese bonds on a net basis? This is the second-best result in the entire history of accounting. A new record could be set in July.

Dynamics of Japanese bond yields and their purchases by foreign investors

Source: Bloomberg.

Thus, the answer to the question of how long the yen will strengthen is obvious – until the yield on US Treasuries goes up. According to Buckler Securities, there is reason to believe that the yield has reached a minimum. Net speculative Treasury shorts are at their lowest since April 19. It seems that the process of their closure due to the unfulfilled, dominant in early 2021, the idea of ​​rate growth is coming to an end. In the near future, expect a stabilization or even a rally in the yield of 10-year US bonds, which will make the yen a Forex outsider again.

Weekly USDJPY trading plan

New COVID-19 variants could save USDJPY bears, causing chaos in financial markets. However, let’s forget about the apocalypse. I prefer to believe in a bright future. In this regard, I recommend entering USD medium and long-term longs against the yen above level 110.5.

     

 

 

Price chart of USDJPY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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