Japan had no need to intervene in currency markets to force USD/JPY bulls to retreat. Verbal interventions were enough. The government bought itself some time and is now reaping the benefits of the US dollar’s weakness. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- USD/JPY quotes decline due to a weaker dollar.
- The Bank of Japan does not plan to raise interest rates in April.
- The yen is not being used as a funding currency.
- Short trades can be considered as long as the USD/JPY pair remains below 159.5.
Weekly Fundamental Forecast for Yen
Investors are increasingly driven by sentiment, reacting to reports of a potential new round of US–Iran negotiations. As a result, the greenback is facing some pressure as a safe-haven asset. On the other hand, oil prices remain high, which is hampering USD/JPY bears. Japan is heavily dependent on energy exports, and its economy will suffer more from geopolitical tensions than the US economy.
The bullish oil market has prompted Japanese analysts to lower earnings forecasts for 113 TOPIX-listed companies. The outlook for US companies looks much better, and capital flows from Asia to the US could become a key driver of the USDJPY rally.
Performance of Carry Trade Strategy
Source: Bloomberg.
Meanwhile, the yen is no longer being used as a funding currency in carry trades. Japanese bond yields are at high levels amid expectations of tighter monetary policy. However, carry trades require low volatility to generate profits properly. Volatility, on the other hand, remains high due to geopolitical tensions.
At the same time, Kazuo Ueda’s dovish rhetoric has disappointed USD/JPY bears. The Bank of Japan governor stated that the regulator would closely monitor developments in the Middle East. However, he did not signal an overnight rate hike at the upcoming BoJ meeting, despite having previously hinted at a tightening of monetary policy. Markets interpreted this as a setback to tightening expectations, with the perceived probability of an April rate hike falling from 55% to 32%.
Probability of Monetary Tightening by BoJ in April
Source: Bloomberg.
Kazuo Ueda has chosen the right moment for his remarks. The US dollar is weakening amid hopes for a resumption of talks between Washington and Tehran. With this in mind, bears could be deprived of an important advantage, and USD/JPY quotes will continue to fall.
The Bank of Japan’s reluctance to continue its cycle of monetary tightening is good news for the Japanese government. Prime Minister Sanae Takaichi criticized her staff for saying that lower import prices could be achieved by tightening monetary policy.
The authorities got what they wanted. Through verbal interventions, they tempered USD/JPY bulls without spending a single penny. The government bought time and is now reaping the benefits of the US dollar’s weakness amid the de-escalation of the conflict in the Middle East and the resulting decline in demand for the greenback as a safe-haven asset. Another issue is that oil prices remain elevated, which will slow down the Japanese economy.
Weekly USDJPY Trading Plan
The USD/JPY pair is likely to consolidate within the 158.5–160 range. Only a breakout above or below this range will allow the pair to define its further direction. As long as quotes remain below 159.5, short trades can be opened.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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