Japanese Yen price forecast 6 October 2021 | USDJPY Fundamental analysis
For years, the BoJ was unable to reach its inflation target, despite colossal monetary stimulus. The world economy on the verge of stagflation and the weakening yen can significantly simplify the task. Let us discuss the Forex outlook and make up a trading plan for USDJPY.
Monthly Japanese yen fundamental forecast
Rules are made to be broken. While most of the world’s central banks are thinking about how to smooth out supply shocks and solve the problem of the coming stagflation with the help of monetary policy, BoJ does not experience such problems. Moreover, it can benefit from the current situation. With supply chain disruptions and a weakening yen, inflation in Japan is finally getting the case to move up.
The truth is that different economies around the world have emerged from the recession in different ways. Haruhiko Kuroda noted that, unlike the United States, Japanese companies in the economic downturn preferred not to dismiss employees but to cut their salaries and keep jobs. As a result, there is no shortage of personnel in Japan, as in the United States. Local employers do not need to raise wages to attract workers. Hence inflation in Japan is not and will not rise as fast as in the US. If so, then the BoJ does not need to abandon its ultra-easy monetary policy, which creates a solid foundation under the USDJPY uptrend.
Dynamics of unemployment in the USA and Japan
Source: Trading Economics.
The different dynamics of consumer prices in the United States and Japan are key to understanding what is happening and will happen to the analyzed pair. For many months, the Fed kept repeating the mantra about the temporary nature of high inflation, which pushed Treasury yields to the very bottom. Recently, FOMC officials have begun to refrain from the old rhetoric, arguing that the factors pushing the CPI up, most likely, will remain in force in 2022. Does this mean admitting their own mistakes? If so, the rates on US debt risk growing significantly higher, which will force the USDJPY bears to retreat.
In fact, Forex exchange rates are determined by capital flows. While the Bank of Japan, using yield curve targeting, keeps rates on local bonds at zero level, the price of the analyzed pair begins to depend on the Treasury yield. Its rally means the flow of capital from Asia to North America and the yen’s weakening against the greenback. Indeed, at present, the interest rate differential on the 10-year US and Japanese securities has been fluctuating near the maximum levels since March 2020, which predetermines the dominance of the USDJPY bulls.
Dynamics of USDJPY and Treasury yield
Source: Trading Economics.
Monthly USDJPY trading plan
How long will the Treasury sell-off last, and how high can yields climb? In my opinion, if the economy returns to its normal state, and central banks are going to get rid of monetary stimulus, then the markets should return to normal as well. I expect the March peak of 1.75% on 10-year bonds to fall quickly and rates will continue to rally in the direction of at least 2%. This gives reason to adhere to the previous strategy of buying USDJPY on correction in the direction of 113 and 115.
Price chart of USDJPY in real time mode
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