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When the topic of divergence in Fed-BoJ monetary policy loses its relevance, traders should closely monitor carry trades, stock indexes and volatility. Let us discuss the Forex outlook and make up a trading plan for USDJPY.
Weekly Japanese yen fundamental forecast
The statements of official Tokyo and the views of financial markets sound the same, but the meaning is different and often opposite. Japanese Deputy Finance Minister Masato Kanda said that the government is not satisfied with the high volatility of the yen, and it is ready to intervene at any time. However, increased volatility is exactly what the USDJPY bears need. Thanks to it, sellers can break the uptrend.
In fact, by increased volatility, officials mean excessive fluctuations in the exchange rate. First of all, a sharp weakening of the yen. Officials are trying to set a ceiling for USDJPY using verbal interventions. For markets, an increase in the volatility of the pair’s quotes serves as a signal to exit the carry trade and return to the yen as a funding currency.
The weakening of the Japanese currency by 39% against the US dollar over the past three years has allowed traders to make great money on the difference. Based on the results of 2023, trades involving the yen, Colombian, Chilean or Mexican pesos brought about 35% profit. Since the beginning of 2024, they have increased their portfolio size by another 4.5%. The exit from the carry trade could be very quick as hedge funds have increased their JPY net shorts to their highest levels since 2018.
Dynamics of yen leveraged fund net futures position
Source: Bloomberg.
When the government does not want to allow increased volatility, and USDJPY bears demand it, BoJ officials must be very careful. They must prepare the markets for monetary normalization, which is what Board of Governors member Hajime Takata did. He said the BoJ had finally turned its attention to moving away from negative rates. Inflation and wages must convince officials that they will continue to grow. In order for monetary policy to correspond to economic conditions, the stance should be changed. At the same time, the policy will still remain accommodative.
After such comments, the chances of an overnight rate increase in March rose to 42% and in April to 85%, while USDJPY fell below 150.
Probability of the start of BoJ monetary restriction in March
Source: Bloomberg.
The market is confident that the BoJ will act slowly and gives a high probability that the salary negotiations will trigger monetary normalization. These factors have already been priced in USDJPY quotes. Therefore, one of the following conditions is necessary to break a trend. First, the central bank’s refusal of the policy of negative rates. Second, a sharp increase in the yen volatility will lead to a massive exit from carry trades. Third, correction in Japanese stock indices. In the latter case, foreign investors will refuse to hedge currency risks with the subsequent fall of the analyzed pair.
Weekly USDJPY trading plan
Thus, USDJPY bears face serious difficulties in their attempts to break the uptrend. Reasons for entering sales will be the dollar’s failure to return above ¥150.55 or its fall below ¥149.8.
Price chart of USDJPY in real time mode
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