Although the USDJPY uptrend looks strong, even stronger trends could break down. The USDJPY downtrend will hardly start right now, but a correction can well happen. Let us discuss the Forex outlook and make up a trading plan.
Weekly yen fundamental forecast
Although the idea of buying the USDJPY based on the divergence in monetary policies of the Fed and the Bank of Japan looks really attractive, one shouldn’t go too far. Since the beginning of the year, the US dollar has risen nearly 19% against the yen as Washington aggressively raises rates and Tokyo finds a thousand reasons not to. However, the yen seems to have dropped too low, and the approaching global recession is a strong reason to expect a correction of the USD versus the yen.
The Bank of Japan is not going to abandon its ultra-easy monetary policy. At its July meeting, it left the overnight rate at -0.1% and the yield target for 10-year bonds near zero. Haruhiko Kuroda noted that the economy is recovering from the pandemic, and the worsening trade terms press down incomes. Under such conditions, the BoJ should maintain the current monetary policy parameters to increase corporate profits, which will eventually translate into wage growth.
Although inflation in Japan exceeded the 2% target in June, and the central bank predicts it will rise to 2.3% in the fiscal year 2022, the indicator is still lower than in other advanced economies. Cost-push inflation in Japan is not associated with strong domestic demand. Real wages fell by 1.8%, the worst performance in almost two years.
Dynamics of inflation
Source: Bloomberg.
Thus, the BoJ has every reason to maintain the current ultra-easy monetary policy, which has contributed to the yen weakening for a long time. Nevertheless, the BoJ is not willing to resort to Forex interventions. Haruhiko Kuroda says that the USDJPY won’t significantly drop unless there is a huge interest rate hike, which will hinder the economic recovery in Japan.
Official Tokyo, of course, is concerned about the yen weakness, widening Japan’s trade deficit. In June, Japan recorded its 11th trade deficit, driven by the yen fall and rising energy prices, which resulted in a 46.1% increase in imports.
Dynamics of Japan’s trade balance
Source: Bloomberg.
The BoJ will not carry out currency interventions. This requires a coordinated intervention, and the Fed, pleased with a strong dollar, is unlikely to participate. However, financial markets could support the yen. The global recession seems to be inevitable. Therefore, the Treasury yield will drop, contributing to the USDJPY correction up.
Weekly USDJPY trading plan
I believe a slowdown in the Fed’s monetary tightening and a technical downturn in the US economy suggest one could add up to the USDJPY shorts entered at level 138.5 if the price breaks out the support at 135.8.
Price chart of USDJPY in real time mode
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