.jpg)
Fed-BoJ monetary divergence is not the only driver of the USDJPY fall. When carry traders exit trades and foreign investors stop hedging currency risks, the yen rises. Let us discuss the Forex outlook and make up a trading plan.
Weekly Japanese yen fundamental forecast
The topic of divergence in the monetary policies of the Fed and the Bank of Japan is again relevant on Forex. Jerome Powell’s announcement that the Federal funds rate cut is near and rumors that the Board of Governors may begin normalizing monetary policy as early as March have led to some results. The consolidation of USDJPY ended with a confident breakout downwards, providing decent profits according to the previous strategy.
Four Reuters sources said the Bank of Japan may not wait until April to abandon its negative interest rate policy. The next meeting will take place on March 18-19, and on the 15th the results of wage negotiations from the largest trade union Rengo will be published. The rate rose to 5.85% among its members (the highest since 1993). However, the Board of Governors may postpone the decision until April to await the release of the Tankan business sentiment survey and the report of the bank’s regional branch managers.
The opening of yen net shorts and the correction of stock indices contributed to the USDJPY uptrend breakout. Hedge funds added to yen net short positions to the highest levels since April 2022. Their exiting launched an avalanche of USDJPY sales towards six-week lows.
Dynamics of USDJPY and yen net short positions
Source: Bloomberg.
The Nikkei 225 rally was an important driver for the strengthening of the US dollar against the yen, as foreign investors actively hedged currency risks and even made money from it. As a result, the correlation of the stock market with the yen reached its highest level since January 2022. As soon as the stock index began to decline, foreign investors began to exit their hedge positions. This exacerbated USDJPY’s decline.
Dynamics of correlation between USDJPY and Nikkei 225
Source: Bloomberg.
The fall of the stock market worldwide, including the US, signals a deterioration in global risk appetite and forces traders to exit their trades. As a result, the yen benefits as a funding currency.
Thus, not only the Fed-BoJ monetary divergence affected the USDJPY uptrend breakout. The exit of speculative yen shorts, correction of stock indices and exit from carry trades also contributed. Until the BoJ meeting on March 18-19, the pair will remain under pressure, as talk about the central bank abandoning its negative interest rate policy will encourage the bears.
Weekly USDJPY trading plan
The only thing that can save the US dollar is the acceleration of American inflation in February. However, if consumer prices rise by 3.1% (according to Bloomberg), and the core indicator slows from 3.9% to 3.7%, USDJPY bulls will have virtually no chance. Continue to add up to the short trades entered at 150.1 and 149.8 on corrections. Focus on 145.9 and 143.9 as initial targets.
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.
