Yen is tired of surprise. Forecast as of 18.09.2023

2023.09.18 2023.09.18
Yen is tired of surprise. Forecast as of 18.09.2023

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

The Fed is likely to keep its 5.75% federal funds rate forecast in place, and the Bank of Japan will refrain from surprises in September. How the divergence in monetary policy will affect the yen? Let us discuss the Forex outlook and make up a USDJPY trading plan.

Weekly Japanese yen fundamental forecast

Surprises are good, but not all the time. Since the end of 2022, the Bank of Japan has already surprised the markets several times. The regulator has expanded the bond yield target range twice and resorted to foreign exchange interventions. Therefore, when Kazuo Ueda spoke about obtaining the necessary information for the BoJ to abandon the yield curve control policy, it only had a short-term effect on the USDJPY. After all, the BoJ governor may not be understood correctly.

It is clear why the Japanese yen is the worst G10 performer, and the US dollar is one of the best. The reason is not the GDP growth rate. The Japanese growth is slower than the US, but it is higher than the UK or the euro-area. The latter two economies are balancing on the verge of stagflation and recession. The economic situation in Japan is different. Tokyo is struggling with deflation, which is forcing the regulator to maintain monetary stimulus, weakening the yen. Against this background, the Fed’s hawkish stance makes divergence in monetary policy the main driver of the USDJPY rally.

The yen’s weakness makes the government use verbal interventions while the BoJ is talking about abandoning the yield curve control. This increases the USDJPY volatility amid the expectations for the official Tokyo to buy foreign currency. In theory, this situation should strengthen the yen, as carry traders should return to the funding currency. In fact, the FX interventions are yet too far as the USDJPY is rising not so fast as in late 2022.

Dynamics of yen volatility and USDJPY

Source: Bloomberg.

While the Bank of Japan is comfortable with the weakness of the yen, which accelerates inflation, the government, on the contrary, is not satisfied. In the energy-import-dependent country, the USDJPY rally is worsening foreign trade and slowing GDP. Therefore, the currency intervention of official Tokyo is a matter of time. However, the time has not yet come.

The Japanese government seems to be acting in opposite ways. In 2024, Japan is to expand its tax-free investment system. The population has the opportunity to direct their money to purchase securities through special accounts. At the same time, the low profitability of local assets contributes to the growth of interest in foreign ones. While the $50 billion investment is not large enough to impact the yen, tax breaks are on the way, and the household savings pool is $7.5 trillion. This money can weaken the yen not only in 2023 but also in 2024.

Dynamics of Japanese retail investors’ demand for foreign assets

Source: Bloomberg.

Weekly USDJPY trading plan

The divergence in monetary policy is still a main driver of the yen-to-dollar rate. Despite maintaining the federal funds rate at 5.5% in early autumn, the Fed will most likely sound hawkish and leave its forecast for 5.75% in force. At the same time, the Bank of Japan will not present any surprises on September 22. This balance of forces suggests adding up the USDJPY longs entered at 145.9 if the price breaks out of the resistance at 148.