The weakness of safe-haven currencies amid a pandemic looks like a paradox. But investors are used to focusing on a bright future, namely the USDJPY rally. Let us discuss the Forex outlook and make up a trading plan
Monthly Japanese yen fundamental forecast
The incessant rally of US stocks is finally starting to force investors to flee from safe-haven assets such as the yen. Japanese investors, looking at how the S&P 500 reaches a 51-record high in 2021, can not afford to stay on the sidelines. The flow of capital from Asia to North America, sooner or later, was bound to lead to the USDJPY growth. The first signs of a recovery of the long-term uptrend begin to appear at the end of the summer.
Based on factors such as discrepancies in central bank monetary policy and economic growth, the yen should have given up long ago. Even a series of disappointing US data releases lowered its third-quarter GDP forecast to just 5.7%. The Fed is not going to abandon the idea of normalizing monetary policy, and Washington is not going to introduce lockdowns. Tokyo, on the other hand, is ready to isolate up to 80% of the population, and BoJ Board member Toyoaki Nakamura said that the recovery of the Japanese economy is being postponed. Such statements increase the risks of lowering forecasts by the Bank of Japan and increase the likelihood that the regulator will continue to adhere to ultra-easy monetary policy even at a time when its counterparts from other countries will raise rates.
For the time being, the USDJPY bears resisted the fundamentals, which, in my opinion, was due to the reluctance of Treasury bond yields to grow. Investors bought Treasuries out of fears that an excessively rapid normalization of the Fed’s monetary policy would lead to a significant slowdown in US GDP in the future. Today, a completely different idea has arisen in their minds: the Fed’s snail pace will help to heat the economy to a boiling point. As a result, rates on monetary-sensitive 5-year bonds rise in relation to the yield curve, which leads to a price increase of the analyzed pair.
Dynamics of the five-year yield and the yield curve
Source: Bloomberg.
I think that the markets believed that Jerome Powell will not present a hawkish surprise in Jackson Hole and will not be intimidated by the Delta. Despite the rise of COVID-19 cases in the United States, the death rate is far from the levels at the beginning of the year. Most likely, it’s all about the mass vaccination. In such circumstances, it is unlikely that the Fed chairman will make decisions on monetary policy dependent on a pandemic.
Dynamics of COVID-19 mortality in the United States
Source: Trading Economics.
Monthly USDJPY trading plan
Thus, the flow of money from Japan to the United States, from bonds to stocks, increases the chances that USDJPY has decided on the direction of further movement. Growth looks much preferable to decline. At the same time, a breakout of the resistances at 110.5 and 110.65 may be a reason to enter long trades in the direction of 111.7 and 113.7.
Will the correction of US stock indices make adjustments to the plans of the bulls, which is expected by almost two-thirds of more than a hundred experts polled by Reuters? It is not a fact that there will be the S&P 500 correction. Even in the opposite case, the main thing is that Treasury yields do not stop growing.
Price chart of USDJPY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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