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Despite Bloomberg’s bearish forecast for USDJPY at the end of the year, the pair can change quickly. Its future will depend on the verdicts of central banks. Let’s discuss the Forex outlook and make up a trading plan.
Weekly Japanese yen fundamental forecast
After trade union negotiations with Japanese companies showed wage growth of 5.28%, a 33-year high that exceeds forecasts of 4.5%, the markets began to prepare for big changes. BoJ officials are on the verge of abandoning the policy of negative rates and are ready to give up control of the yield curve and reduce QE. A great reason to sell USDJPY, right?
In fact, 62% of Reuters experts are still confident that BoJ monetary policy normalization will start in April. Although the share of voters for March increased over the month from 7% to 35%. If the overnight rate does not change on March 19, USDJPY risks returning above 150. On the contrary, its increase will become a catalyst for sales.
The median forecast for the US dollar at the end of 2024 is 140, which is 6.1% lower than current levels. However, at the beginning of 2024, the figure was ¥135. The bears weakened amid the greenback’s recovery in January-February. In mid-March, it strengthened again.
Dynamics of USDJPY forecasts
Source: Bloomberg.
The forecasts for USDJPY are based on monetary divergence. The derivatives market expects the Bank of Japan to raise rates several times and the Fed to lower them at three FOMC meetings in 2024. As a result, Japanese bond yields will rise, its gap with American counterparts will narrow, and the US dollar will weaken against the yen. Since the BoJ began its QE program in 2013 and introduced yield curve control in 2016, Japanese debt rates have been virtually frozen, with USDJPY reacting solely to Treasury yields.
Dynamics of USDJPY and US Treasury yields
Source: Bloomberg.
In mid-March, traders had a unique opportunity to test how monetary policy divergence works. The Bank of Japan’s increase in the overnight rate and the preservation of the December FOMC forecast of three acts of monetary expansion in 2024 are necessary conditions for the fall of the US dollar against the yen. On the contrary, if Kazuo Ueda decides to take his time and the Fed becomes more hawkish, USDJPY could soar above 150.
In fact, abandoning the policy of negative rates is a necessity. If this happens, it will be the first time since 2007. The Bank of Japan’s decisiveness is a strong argument in favor of yen purchases. However, in any pair, there are always two currencies. If Fed officials show their concern about a possible repeat of 1970s events and mention two acts of monetary expansion in their updated forecasts, the USD recovery will shock USDJPY bears.
Weekly USDJPY trading plan
Thus, two days from March 19 to 20 are a key period for the analyzed pair. Despite the high probability of its fall by the end of 2024, consider different options for the development of events in the short-term. At the same time, the return of USDJPY to 148.8, followed by consolidation below this level, will become the basis for sales.
Price chart of USDJPY in real time mode
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