The yen continues collapsing, and finding weighty arguments for a pullback becomes harder every day. However, the government’s discontent and inflated speculative shorts in the Japanese currency may step in. Will they? Let’s find that out and make a trading plan for the USDJPY.

Monthly fundamental forecast for yen

Hasty climbers have sudden falls. That doesn’t seem to concern the USDJPY, though. An energy crisis, a flight of capital from Japan, and a divergence in the Fed’s and the BoJ’s monetary policies made the quotes soar to their highest since the end of 2018. However, the higher the USD climbs against the yen, the more they talk the bullish trend will start to fade out soon. 

The yen lost 2.5% against the greenback over the last month and more than 10% since the beginning of the year, thus becoming the worst G10 performer. Since imports of energy resources have a singificant share in Japan’s foreign trade structure, the weakness of its currency is consistent with record-high coal and gas prices.

The USDJPY buyers are inspired by bond yields, including treasury bond ones, soaring amid global inflation’s spike and expectations that the world’s leading central banks will normalize monetary policies. As the Bank of Japan doesn’t plan to abandon its rate targeting policy in the local bond market, bond yields are becoming more and more differing, making capital flow from Asia to Europe and North America.

The Bank of America believes the divergence in the Fed’s and the BoJ’s monetary policies and the related capital flow from Japan to the USA will help the USDJPY rally to 116 by the end of 2021 and to 120 in 2022. Societe Generale disagrees, pointing to a tight connection between the yen’s reversal risk and US inflation expectations, which have gone so far away that the Fed is trying hard to slow them down. According to the French company, the upward movement might lose momentum, and the pair will correct unless the dollar breaks through a level of ¥115 shortly.

Yen risk reversal and US inflation expectations

Source: Bloomberg.

There are a few indications that the yen may retrace soon: Japanese net shorts are inflated in the derivatives market; the USDJPY would trade beneath the current levels when the US/Japan bond yield difference was the same as now; Tokyo isn’t glad about the yen’s fast weakening. Vice-Minister of Cabinet Office Yoshihiko Isozaki said a stable currency rate was crucial to the economy, so the government continued keeping an eye on Forex developments.

There’s a long-life factor as well. After the impact of lower cellphone prices on inflation remains in the past, Japan’s base CPI may reach 1.4%. That will give reasons for talking about monetary policy normalization and support the yen. 

Japan’s, US’, and eurozone’s inflation trends


Source: Bloomberg.

Monthly trading plan for USDJPY

However, the gap between the central banks’ rates might have grown even larger by that time and thus push the USDJPY‘s quotes higher. The first out of two targets of 113 and 115 set in the previous article has been reached. I recommend opening long positions in the direction of 115 – 116 on retracements from support levels of 113.7 – 113.8 and 113 – 113.2.

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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