Yen will not rush. Forecast as of 30.05.2023

2023.05.30 2023.05.30
Yen will not rush. Forecast as of 30.05.2023

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

Divergence in monetary policy in action! While the markets have come to terms with the unwillingness of the new BoJ head, Kazuo Ueda, to change something, the Fed is going to raise rates. This helped USDJPY to rise above 140. What’s next? Let’s discuss this topic and make up a trading plan.

Weekly Japanese yen fundamental forecast

USDJPY’s first rise above 140 since November 2022 was due to a strong dollar, not a weak yen. Investors have resigned themselves to the idea that the Bank of Japan will not normalize monetary policy. Against the backdrop of futures market expectations of the federal funds rate increase to 5.5%, this indicates a possible divergence. Treasury yields are growing, as is its spread with Japanese counterparts. As a result, USDJPY has no choice but to grow.

Kazuo Ueda believes that ultra-easy monetary policy should be used patiently, as there is still a long way to go before a stable price increase of up to 2%, along with a steady rise in wages. Inflation will likely slow down to the required level by the middle of the current fiscal year but then recover. The Bank of Japan forecasts that consumer price growth will slow to 1.8% by March 2024. This estimate is lower than the 2.3% by the Japan Economic Research Center.

It is difficult to say whether everything is going according to Kazuo Ueda’s plan. Tokyo’s CPI, the leading indicator for the country’s inflation, slowed to 3.2% in May. However, the figure, excluding energy and fresh food, in contrast, accelerated to the highest level since 1982.

Tokyo consumer price dynamics

Source: Bloomberg.

In any case, the market is gradually getting used to the idea that the new BoE head is not going to abandon the legacy of the past. Although Kazuo Ueda understands that the current yield curve control system distorts prices, lacks flexibility, requires large purchases of government bonds, and makes the yen vulnerable to speculators, he will carefully assess the situation. At best, the central bank will begin to carefully prepare markets for normalization in the second half of the year, but is unlikely to take a decisive step.

UBS and Societe Generale experts predict an adjustment of the ultra-easy monetary policy in July-October, which will lead to a 7-15% USDJPY decline by the end of the year. Their opinion does not coincide with the majority. Most speculators are selling the yen while hedge fund net shorts hit their highest levels in more than a year in the week ended May 23.

Dynamics of USDJPY and yen’s net short positions

Source: Bloomberg.

In such conditions, the increase in the probability of a June federal funds rate hike to 60% leads to USD strengthening. The USDJPY rally is based on an increase in the treasury yield associated with the debt ceiling issue and the continuation of the Fed’s monetary restriction cycle. It is unlikely that increase rates will decrease against the backdrop of $1.1 trillion in debt issuance over the next seven months. Another thing is if the US data starts to deteriorate.

Weekly USDJPY trading plan

Bloomberg experts predict a slowdown in employment growth from 253 thousand to 180 thousand and an increase in the unemployment rate from 3.4% to 3.5% in May. If the final figures disappoint, USDJPY risks declining. If the pair does not hold at 140.5, this will make opening short trades possible.

Price chart of USDJPY in real time mode