Speculators in the USD/JPY market initially sold the pair amid expectations of further monetary tightening by the Bank of Japan and major shifts in US policy, only to start buying once the news broke. The yen was sent on a roller-coaster ride. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan has no clear view on what will happen with inflation.
- The yen is reacting differently to market stress.
- Nominal wages are hitting record highs.
- Strong CPI figures could prompt traders to buy the USD/JPY with a target of 160.4.
Weekly Fundamental Forecast for Yen
First impressions can be misleading. At first glance, the increase in the overnight rate to 1.25% and the stock market crash should have pushed the USD/JPY lower. The Bank of Japan said it had succeeded in bringing inflation back to its target, which investors interpreted as a signal that the monetary tightening cycle could soon resume. Moreover, the yen has long been regarded as a safe-haven currency and should therefore have strengthened amid the sell-off in US equities. Yet neither development played out as expected.
Goldman Sachs describes the yen as an effective hedge against an AI-driven market shock. CIBC Capital Markets argues that investors’ retreat from AI-related assets is redirecting capital into other markets, potentially benefiting the yen and the Swiss franc. Against this backdrop, the firm forecasts that the USD/JPY will slide to 148 by the end of 2027.
Central Banks’ Interest Rates
Source: Bloomberg.
In fact, times are changing. The wide interest rate differential between central banks, combined with the substantial overseas investments held by Japanese investors, calls for a reassessment of the yen’s traditional role. During periods of market stress, the Japanese currency is often sold as investors seek to raise liquidity and avoid margin calls on equity positions.
Markets also have a habit of changing their minds. Initial reactions often prove misguided. For example, the Democrats’ victory in the midterm elections initially sent the USD/JPY lower. However, speculators quickly shifted their attention from politics back to economic fundamentals, allowing the US dollar to recover on the back of a stronger-than-expected US employment report.
Investors interpreted the Bank of Japan’s statement about having brought inflation under control in precisely the way they wanted. However, the more nuanced wording used by Governor Kazuo Ueda changed the picture. He acknowledged that inflation had reached the 2% target but cautioned that it remained unclear how long it would stay there. He described the situation as being in equilibrium. Such comments suggest that the central bank is in no hurry to act. In other words, the BoJ is likely to take its time before embarking on another round of monetary tightening.
Japan’s Nominal Wages
Source: Bloomberg.
The Bank of Japan has reasons to raise interest rates. Nominal wages in Japan have risen at their fastest pace in three decades, climbing 4.6% year over year in September. Base wages increased by 3.7%, while wages excluding bonuses and overtime pay recorded a historic gain of 3.1%. This trend suggests that higher energy prices are gradually feeding through into broader inflation via second-round effects. That provides the BoJ with a compelling argument for continuing its monetary tightening cycle.
Weekly USDJPY Trading Plan
The near-term direction of the USD/JPY will be determined not in Tokyo, but in Washington. Strong US inflation data would provide a catalyst for buying the pair, opening the way toward 160.4. Conversely, a weaker-than-expected CPI reading could trigger selling pressure, with a break below 157.1 providing a bearish signal.
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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