The Bank of Japan considers high inflation a temporary phenomenon, which is similar to the 2021 Fed’s stance. This stance has been changed significantly, which led to the strengthening of the US dollar. Does the same fate await the yen? Let us discuss the Forex outlook and make up a USDJPY trading plan.
Weekly yen fundamental forecast
All the world’s central banks seem to be following the same pattern. First, they consider high inflation temporary, then they begin to doubt it, and finally, they move on to aggressive monetary tightening. The Fed, Canadian, UK, and New Zealand regulators are currently in the third phase, catching up with consumer prices. The ECB and the Reserve Bank of Australia are in the second phase, while the Bank of Japan has stuck at the start. This fact makes it easy to explain USDJPY‘s rise to 20-year highs.
According to BoJ officials, cost-driven inflation will eventually reduce domestic demand and cool the economy. The reasons for the price rise lie beyond the central bank’s control. Therefore, the BoJ should remain committed to an ultra-easy monetary policy. Including keeping the yield on 10-year Japanese bonds near zero. At the same time, the Fed’s intention to quickly reach a neutral level on the federal funds rate contributes to the rise in treasury yield and USDJPY rally and widens the gap with Japanese peers.
The USDJPY is rallying so fast that verbal interventions by the government officials saying that a weak yen is doing more harm than good to the Japanese economy are not helping. As a result, the Ministry of Finance can only hint at foreign exchange interventions. The BoJ head, Shunichi Suzuki, at a meeting with his US counterpart Janet Yellen, discussed the issues of the existing G7 and G20 agreements on exchange rates.
In my opinion, the official Tokyo continues to waste breath, while the yen’s fate can only be affected by a change in the BoJ stance. 89% of 45 Bloomberg experts do not expect any adjustments to the BoJ’s monetary policy at the April 27-28 meeting. However, about 45% of experts believe that such changes will be made before the end of 2022. This figure is more than double the 19% in the March survey.
Economists expect the BoJ to raise its inflation forecast to 1.7% in 2022 and 1.2% in 2023. Such a consumer price trajectory will again confirm the BoJ’s belief in the temporary nature of high inflation, which implies the continuation of ultra-easy monetary policy for many years. If so, then the USDJPY pair will get even closer to level 130.
USDJPY trading plan for a week
What can save the yen from falling to the abovementioned mark in the short term? I think the weak data on US GDP for the first quarter and further acceleration of inflation in the eurozone. In the first case, the yield of treasury bonds should decrease. In the second case, the USD index should weaken. As a result, the USDJPY pair may correct towards 126.9 and 126.2. It will be relevant to enter medium- and long-term long trades based on the divergence in the Fed’s monetary policy and the BoJ when the price rebounds from the supports at the beforementioned levels.
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