Yen plunges into the deep. Forecast as of 18.03.2022


The USDJPY quotes steadied January and February amid uncertainties in the Fed’s policy and the Ukraine crisis, but the pair decided on its direction in March. Let’s discuss that and make a trading plan.

Monthly fundamental forecast for yen

The world’s economy moves from recessions to recovery and from overheating to recessions. Pandemics and wars speed that process up, allowing us to talk about crisis times. When shocked, investors seek to save their money buying safe-haven assets, and the Japanese yen is usually particularly popular. Not this time, though. Japan’s currency has been the worst G10 performer in the past month, and evil tongues call it “a too expensive safe haven.” 

Most big perturbations, including the Russian default and the collapse of the LTCM fund in 1998, the great financial crisis in 2007-2009, and the 2020 COVID pandemic, have led to the yen’s significant consolidation in the past forty years. The USDJPY‘s 7% fall on 7 October 1998 amid Moscow’s refusal to pay the debt was very significant. That week, the pair slumped 16%. Those were two record low values. 

Global demand and commodity prices usually fall following crises, and the US bond yields also decline as investors shift capital to safe-haven assets. However, everything is different this time. International Energy Agency has warned that excluding Russia from the global financial system will cut oil supply by 3 million b/d, and Brent will continue growing. The Fed intends to raise the federal funds rate at each FOMC meeting in 2022. The indicator may exceed the neutral fed funds rate, which will push treasury yields up. 

Japan is a net buyer of energy resources. As their price was growing, imports increased 34% y-o-y in February, and the foreign trade deficit reached ¥668.3 billion. That’s much higher than Reuters’ estimation of ¥112.6 billion. Japan buys commodities for dollars, and they need the US currency. Thus, the USDJPY‘s rally has nothing to do with the demand for safe-haven assets. As a safe-haven asset, the yen is too expensive amid the global bond market’s high rates.

USDJPY and import prices

  

Source: Reuters.

So, the Bank of Japan is a white raven at Forex, and that only worsens the USDJPY bears’ positions. Unlike the Fed and other regulators, the BoJ does not plan to tighten monetary policy. At the meeting on 18 March, they kept monetary stimuli and warned that the Ukraine crisis destabilized financial markets and increased commodity prices. Haruhiko Kuroda said earlier that Japan’s inflation was different from the US’, unlikely to reach 2% in the nearest future. 

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

Source: Bloomberg.

Monthly trading plan for USDJPY

To conclude, the USDJPY‘s uptrend is based on the fact that the yen lost its safe-haven status amid growing commodity prices and US bond yields, the divergence between the Fed’s and the BoJ’s monetary policies, and different economic growth paces. Reuters expects Japan’s GDP to slow down in Q1 against a backdrop of previous COVID restrictions. These factors allow me to stick to my previous strategy of buying the pair on pullbacks with targets at 120 and 120.4.

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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