What will save yen? Forecast as of 10.05.2022

The USDJPY trend looks so strong that investors do not think about its reversal. However, there have been many cases when a strong trend has changed dramatically. Let us discuss the Forex outlook and make up a trading plan.

Monthly yen fundamental forecast

A week ago, traders did not know what could save the yen. The USDJPY pair grew rapidly and reached a 20-year high. No one was surprised by Bank of America’s forecast of ¥140 per dollar, followed by the Japanese government’s $100 billion foreign exchange intervention. However, the JPY fate is not as simple as it might seem. This is confirmed by the yen’s reaction to the results of the May FOMC meeting and its subsequent stabilization, despite the ongoing rally in US Treasury yields.

At first glance, the USDJPY bears’ position looks hopeless. According to the minutes of the March BoJ meeting, unlike the US and the UK, Japan’s inflation doesn’t exceed the target of 2%, which requires maintaining an ultra-easy monetary policy. One member of the Board of Governors suggested that uncertainty about the outlook for the global economy and commodity prices could lead to additional monetary stimulus. As the Fed is poised to raise rates aggressively, monetary policy divergence and the associated rally in Treasury yields drive USDJPY higher.

Dynamics of USDJPY and US bond yields


Source: Bloomberg.

The more aggressive the Fed acts, the higher the risk of a recession. Bloomberg experts estimate it at 28% over the next 12 months. This figure continues to grow. The yield curve, which has temporarily reversed this year, also indicates a recession in the US economy. During periods of market turmoil, the yen tends to recover, for example, in March 2020, when news of the pandemic shocked the financial world.

All due to the fact that the yen has all the signs of a safe haven asset. Japan owns $9.6 trillion in foreign assets and $6.5 trillion in liabilities. The Net International Investment Position is 75% of GDP and generates an annual income of 4% of the size of the economy.

The recession is not the only reason for the serious USDJPY correction. The Bank of Japan’s stance could change as consumer prices in Tokyo accelerate to 1.9%, the highest level in decades. It should be noted that from 2010 to 2019, inflation growth in Japan averaged 0.5% compared to 1.4% in the Eurozone. So in relative terms, the current CPI value is comparable to the European indicator. Thus, the spread of high prices for energy and other goods may push BoJ officials to take action.

USDJPY trading plan for a month

Finally, the third reason for the potential decline of USDJPY is the Fed’s decision to slow down monetary restriction amid a slowdown in the US economy, which will affect the treasury yield. Don’t expect the abovementioned slowdown and the BoJ monetary policy normalization in 2022. Anything is possible in 2023, including a recession. In the meantime, it is profitable to buy USDJPY with targets at ¥133.5 and ¥135.

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 LiteFinance. 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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