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What stops the Japanese government and the Bank of Japan from intervening in the Forex market? Today seems to be the day for currency interventions, as the USDJPY pair is surging at a rapid pace. Let’s discuss the Forex outlook and make up a trading plan.
Weekly fundamental forecast for Japanese yen
Some say that nerves are the root of all diseases. The market is nervous. The USDJPY pair fell sharply in the US session on April 16th and then rebounded, indicating that investors are worried about Tokyo’s official currency intervention. The yen is weakening too fast, so the authorities should not let it go with the flow in the Forex market. In 2023, the pair’s sharp fluctuations made people talk about the Bank of Japan’s intervention, which the regulator denied after a while.
Japanese officials, including the Minister of Finance and even the Prime Minister, have offered nothing better than verbal interventions yet refrained from conducting currency interventions. Tokyo understands that bulls cannot be stopped now, no matter how much the USDJPY pair rises. The US economy is showcasing robust indicators. Employment rose by 300,000, consumer prices accelerated to 3.5%, and retail sales exceeded the Bloomberg experts’ forecasts.
As a result, Goldman Sachs raises its GDP forecast for the first quarter to 3.1% while US Treasury yields skyrocket. The widening spread over its Japanese counterparts serves as a solid foundation for the USDJPY to rally.
USDJPY rate and US-Japan bond yield differential
Source: Bloomberg.
Meanwhile, Jerome Powell and his deputy Philip Jefferson say that the Fed’s monetary policy needs more time. The Federal funds rate has settled at 5.5% for the long term. The futures market reduces the monetary policy expansion in 2024 to 41 bps, pushing US dollar rates and Treasuries yields higher.
At the beginning of the year, the Forex market was speculating about a break in the USDJPY uptrend, as the Fed/BoJ interest rate differential was expected to shrink to 3.5% from 5.6% by the end of 2025. Today, this figure has risen to 4.5%. Indeed, there is no question of capital spilling over from Asia to North America, which makes the US dollar a favorite and the yen an outsider on Forex, as the market’s disappointment is too great.
Spread in implicit central banks’ policy rates
Source: Bloomberg.
The market wonders what exactly keeps Tokyo from intervening. It could be an estimated ineffectiveness of interventions or the meeting of central bankers and finance ministers with the IMF. Anyway, USDJPY risks touching 160 without interventions, according to JP Morgan and Bank of America forecasts. T. Rowe Price’s asset manager puts the level at 170, noting that the Bank of Japan does not need a strong yen. It wants to accelerate inflation, so devaluation suits the regulator.
On the other hand, Mitsubishi UFJ Morgan Stanley Securities believes that the government will discredit itself if it does not intervene and calls the 155 level a threshold.
Weekly USDJPY trading plan
Despite the successful entry into long trades from 152 and a decent rally potential, traders should hedge against currency intervention risks using locking positions.
Price chart of USDJPY in real time mode
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