Yen collapses. Forecast as of 25.03.2022

History suggests that USDJPY either hovers on the same levels for a long time or starts moving by leaps and bounds upwards or downwards. In March, there has been a stable uptrend. Will it continue? Let’s check it and make a trading plan. 

Weekly fundamental forecast for yen

Looking at the USDJPY‘s drastic growth, I can hardly disagree with Societe Generale. The bank believes that, bored with the lack of volatility in the Forex market in recent years, traders finally consider the yen’s weakness as an opportunity for action. So, they hurry up to board the ship going north. When Japan’s currency starts trending, it usually moves very fast. According to Societe Generale, the dollar may rise to ¥150, a level last seen in the 1990ies, which comes in above Bloomberg’s expectations of ¥116 by the end of 2022.

The previous estimate is no longer up to date. The higher oil and other commodities climb, the worse Japan’s economy feels, as it is dependent on commodity supplies. Higher commodity prices increase Japan’s negative balance of foreign trade and import prices and thus affect the yen’s rate. At the same time, higher import prices do not worry the Bank of Japan: the regulator thinks wages should rise significantly for monetary policy to be normalized. What’s more, Haruhiko Kuroda believes that a weak yen benefits the economy through exports and a rise in corporate profits of the local companies working in the foreign markets.

Inflation in Japan

Source: Bloomberg.

The BoJ’s commitment to ultra-soft monetary policy and the Fed’s readiness to increase the federal funds rate affect the USDJPY as much as the commodity market boom caused by a supply shock. The differential between the US’ and Japan’s 10-year bond yields has skyrocketed by 60 basis points since the beginning of the year, reaching the level of 2.13% last recorded in 2019. Against that backdrop, the shift of money from Asia to North America looks relevant, which contributes to the USDJPY‘s further rally. Moreover, a 10-trillion-yen university fund, an equivalent of $83 billion, intends to start investing in foreign assets already this year. The Bank of America forecasts that the fund’s activities could be one of the main factors in the dollar’s rise to ¥125 in 2022. 

Despite huge longs taken on the pair, there are also many opponents to its further growth. They argue that the yen is currently the most underestimated G10 currency based on the real effective exchange rate. Also, there’s an enormous volume of net shorts taken on the yen. Believing in a further fall of Japan’s currency, the sellers risk a lot. An allegedly safe rate is the most dangerous thing in Forex. 

USDJPY and speculative positions in yen

Source: Bloomberg.

Weekly trading plan for USDJPY

Unless the US bond yields fall amid an escalation of the Ukraine conflict, the USDJPY risks rallying further on expectations of a 50 basis points rate hike in May. Hold and regularly build on your long positions taken earlier, also on pullbacks from support at 120.95 and 120.35.

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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