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The USDJPY’s rise to its highest levels in three decades was caused by the Bank of Japan’s slowness and the strengthening of the US dollar against major world currencies. Let’s discuss the Forex outlook and make a trading plan.
Fundamental Japanese yen forecast for six months
The Bank of Japan has put an end to its fruitless long-term experiment with negative rates. Without the pandemic, the war in Ukraine and the associated energy crisis, it would hardly have led to victory over deflation. However, it did help due to the devaluation of the yen and rising import prices. However, the reaction of the markets and USDJPY to BoJ’s decisive actions was more surprising than it seemed natural.
The pair surged towards three-decade highs after Kazuo Ueda and his colleagues made it clear that they were not going to normalize monetary policy at the same speed as other central banks in 2021-2023. The Bank of Japan will slowly follow the path of monetary restriction, which puts pressure on the yen, at least for now. Thus, Goldman Sachs raised its forecast for USDJPY in three months to 155. However, after six months, bank officials see the dollar at ¥150 and a year later at ¥145. According to ING, the pair will trade in the 150-152 range while the Fed rate remains unchanged and fall to 140 at the peak of its decline.
Fundamentally, the yen looks undervalued. It is not surprising that Japanese Deputy Finance Minister Masato Kanda called the latest movements of USDJPY speculative and did not rule out intervention by official Tokyo. Indeed, based on the differential in real yields on US and Japanese bonds, the US dollar should be lower.
Dynamics of USDJPY and real bond yield differential
Source: Bloomberg.
Verbal interventions may precede currency interventions, but the market believes that the critical level for USDJPY is 155. The expected timing and scale of the BoJ monetary tightening are much more interesting. Derivatives are forecasting an overnight rate hike in July from 0% to 0.12% with a 51% chance and are fully confident that it will rise to 0.21% in October.
According to Bloomberg, 62% of 47 respondents predict that the Bank of Japan will tighten monetary policy again before November. 2% voted for June, 23% for July, 11% for September, 26% for October. Consensus estimates suggest the overnight rate will rise to 0.25% by the end of 2024.
Forecasts for the start of the next BoJ rate hike
Source: Bloomberg.
The USDJPY rise was influenced not only by the BoJ’s monetary normalization speed, but also by the USD strengthening against major world currencies. The Swiss National Bank has launched a cycle of massive monetary easing, and given the synchronization, the greenback looks like a winner.
USDJPY trading plan for six months
Therefore, in the short term, the USDJPY rally risks continuing, but in the medium and long term, the risks of the pair falling increase. This circumstance makes selling the pair on growth reasonable. In my opinion, in one, three and six months the US dollar will be worth ¥151, ¥148 and ¥145, respectively.
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.
