Monetary policy divergence is a strong driver, but speed and rate differentials are important. Additional uncertainty is introduced by the Trump trade. Let’s discuss this topic and make a trading plan for the USDJPY pair.
The article covers the following subjects:
Major Takeaways
- Robust data increased the odds of a BoJ overnight rate hike in December to 63%.
- The US-Japan bond yield differential is still wide.
- The Trump trade is adding uncertainty to the USDJPY pair’s trajectory.
- Long trades can be opened once the USDJPY pair returns to the 151-155 range.
Weekly fundamental forecast for yen
The USDJPY exchange rate has demonstrated a volatile performance in 2024. Investors are capitalizing on the divergence in monetary policy between the Fed and the Bank of Japan, selling the USDJPY pair. Investors recall the slow pace of regulatory action and the continued divergence in bond yields, prompting a renewed interest in the US dollar. The Trump trade is adding to the volatility. However, the yen has a long history of wide fluctuations.
As the year draws to a close, the divergence in monetary policy has again come to the fore in the market. A batch of positive economic indicators for Japan have increased the likelihood of a Bank of Japan (BoJ) interest rate hike in December to 63%. In October, corporate services prices increased from 2.8% to 2.9%, retail sales surged from 0.7% to 1.6%, and industrial production grew from 1.6% to 3%. Tokyo inflation, a key leading indicator for the national CPI, increased from 1.8% to 2.2% in November.
Tokyo Inflation Index
Source: Bloomberg.
As anticipated, Kazuo Ueda has indicated that the next act of monetary policy normalization is imminent. He also clarified that the following move would depend on incoming data. Against this backdrop, Japanese bond yields rose, and the yen strengthened. If the economy can withstand higher rates, there is a case to be made for raising them further.
In 2024, Japan will spend approximately ¥27 trillion, or about 24% of the size of its total budget, on debt service. Meanwhile, 30-year bond yields have reached their highest point since 2010, while 5-year bond yields have hit their highest level in 15 years. Should interest rates continue to increase, the cost of servicing a debt twice the size of the GDP will rise further. The government is dissatisfied with this situation, underscoring the necessity for a gradual normalization of monetary policy.
US and Japanese bond yields will likely remain elevated for some time, resulting in a capital spillover from Asia to North America, boosting the USDJPY rally.
Major Central Banks’ Interest Rates
Source: Bloomberg.
Another factor that is currently unclear is Donald Trump’s policy agenda. Trade duties and fiscal stimulus will likely support the US economy, although this may also spur inflation, prompting the Fed to slow down its monetary expansion cycle. This scenario is beneficial for USDJPY bulls. However, it is not yet known which of the measures will be implemented and which will not. As a result, the Trump trade retreats, creating opportunities for those investing in the yen.
Weekly USDJPY Trading Plan
The ongoing tug-of-war between the two currencies will unlikely last long. Meanwhile, the statements made by Donald Trump on social media and the anticipation of robust US labor market data for November could potentially diminish the likelihood of a 25-basis-point cut in the federal funds rate from the current 63% in December. This would provide support to the USDJPY pair. A potential buying opportunity may emerge if the pair returns to the range of 151-155.
Price chart of USDJPY in real time mode
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