Yen: pace is too fast. Forecast as of 08.08.2022

Markets often indulge in wishful thinking. They want the Fed to start cutting rates in 2023 so that USDJPY falls. However, in reality, things can turn out differently. Let us discuss the Forex outlook and make up a trading plan.

Weekly yen fundamental forecast

Markets know how to punish overconfidence. Recently, investors announced the end of the USDJPY 38% rally from the lowest levels since March 2020. However, the strong US employment data for July silenced many of them. The federal funds rate can rise above 4%, and the 10-year US Treasury bonds yield to update the June high. So ¥140 per dollar mark is not unimaginable as recession fears recede.

The rapid more than two-year USDJPY rally is based on the divergence in the monetary policy of the Fed and the Bank of Japan, high energy prices, and the transition of the safe-haven status from the yen to the USD.

A lot has changed in the second half of summer. Oil has lost a quarter of its value compared to the March highs. Investors thought the Fed would begin to slow down the monetary restriction due to the weakening economy while falling Treasury yields have returned interest in the yen as a safe haven. Moreover, the Ministry of Finance of Japan said that BoJ’s control over the yield curve could not last indefinitely. As a bond issuer, the Japanese regulator must prepare for new conditions.

Dynamics of USDJPY and US-Japan yield spread


Source: Bloomberg.

All of the above processes are based on fears of a recession. Its approach makes investors think about a reduction in oil demand, lowering the federal funds rate in 2023, and buying treasuries, which will decrease their profitability. A strong labor market undermines the foundations of this theory. During previous recessions, employment was declining. Now it is actively growing. The economy is slowing down. However, it is likely to return to its normal levels after the abnormally high post-pandemic growth.

Most likely, yen shorts from hedge funds will decrease to the lowest levels since March 2021. That is, to more adequate levels.

Dynamics of USDJPY and yen speculative positions

Source: Bloomberg.

There will be no recession, but it will take a lot of effort to avoid it. If the US economy remains strong, then inflation will remain elevated for a very long time. This means that the Fed will continue monetary restriction and raise the federal funds rate above 4%. If so, it is too early to talk about breaking the USDJPY uptrend. Although according to the consensus forecast of Reuters experts, the US dollar will be ¥127 in 12 months.

Weekly USDJPY trading plan

Due to the uncertainty about the Fed’s monetary policy and the recession, the analyzed pair risks being consolidated. Therefore, enter sales when the price rebounds from resistances at 136.1, 136.7 and 137.2. Enter purchases after an unsuccessful breakout of supports at 134.4, 133.7 and 133.

Price chart of EURUSD 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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