The Takaichi trading, which had been booming until the parliamentary elections in Japan, put the yen in an outsider position. However, the Liberal Democratic Party’s landslide victory has turned the tables. Let’s discuss this topic and make a trading plan for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- The LDP’s election victory strengthened the yen.
- Capital repatriation to Japan will accelerate the decline of the USDJPY pair.
- The markets were wrong about the Takaichi trade.
- Short trades on the USD/JPY pair can be opened with targets of 151.4 and 148.5.
Monthly Fundamental Forecast for Yen
Ahead of the 2024 US presidential election, investors were confident that Donald Trump’s victory would strengthen the US dollar. They believed that tariffs would accelerate inflation and slow economic growth abroad. The Fed would keep interest rates high, which, combined with American exceptionalism, would enable the USD index to rise. In fact, quite the opposite happened. In February, history repeated itself. This time with the yen.
Ahead of the parliamentary elections in Japan, the Liberal Democratic Party’s landslide victory was expected to allow the government to pursue aggressive fiscal stimulus. The move would fuel inflation and push the USD/JPY pair higher.
USD/JPY Performance and Currency Interventions
Source: Bloomberg.
The confidence was so strong that Finance Minister Satsuki Katayama said on Sunday, February 8, that her office was ready to enter the market on Monday and was in close contact with the US. There were grave concerns that the dollar would surge to ¥160, forcing the authorities to resort to currency intervention.
However, events unfolded differently. Initially, the market played out the “buy the rumor, sell the news” principle, triggering a decline in USD/JPY prices. Then, investors focused their attention on Sanae Takaichi’s statement that fiscal policy must be sustainable. If the prime minister moves from fiscal profligacy to financial responsibility, it will lay the foundation for Japanese investors to bring their money back home. The yen will receive support and become attractive again.
Nomura agrees with this point of view. The bank believes that political and financial stability will trigger a repatriation process, allowing the USD/JPY pair to close the gap with the yield differential between US and Japanese bonds and bringing the pair’s quotes down to 150.
USD/JPY Rate and US-Japan Bond Yield Spread
Source: TradingView.
From the perspective of debt market rates, the yen does appear to be fundamentally undervalued. While the rise in Japanese debt yields has not previously led to capital returning to Japan, could Sanai Takaichi make this happen?
Let’s not forget about carry trades, which previously gave USD/JPY bulls an advantage. According to BCA Research, there were at least three episodes in 2008, 2015, and 2020 when the unwinding of carry trade operations, driven by a strengthening yen or a deterioration in global risk appetite, left traders in the lurch. This time, history may repeat itself, accelerating the pair’s decline.
Monthly USDJPY Trading Plan
The market was wrong about Donald Trump. Will it make the same mistake with Sanae Takaichi? Political and financial stability, coupled with capital inflows into Japan, are pushing the USD/JPY pair down. Against this backdrop, short trades can be opened with targets of 151.4 and 148.5.
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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