The price of the USD/JPY currency pair may remain stable around its recent gains, following the strong US jobs numbers, until the most important event this week is announced. So far, the Fed's policy tightening factors are increasing and continuing and US job numbers have dispelled fears of US economic recession even for some time. At the beginning of this week's trading, the dollar-yen pair settled around its gains of 135.60, waiting for any news.
Future of Japanese Yen
A growing group of analysts says the biggest profits from betting on the yen - one of the hottest macro trades of 2022 - is a thing of the past. Three main pillars of the yen-selling trade are collapsing - a widening interest rate gap between the US and Japan, higher oil prices and the loss of the currency's status as a haven as mounting recession fears keep a cap on yields, pressure crude oil and return investors to the arms of traditional safe-haven assets. The dollar-yen, which rose 38% from its lows in March 2020 to mid-July this year, is on the decline.
Rodrigo Cattrell, an analyst at National Australia Bank Ltd. In Sydney: “The big short-term yen as we know it this year is over.” And “It is now possible that the dollar-yen peak is behind us.”
Catril is joined by the likes of Rabobank and Daiwa Securities Group Inc. In anticipation of slowing losses for the Japanese currency, the worst performer in the G10 this year. Strategists see the Japanese yen rising to 130 against the dollar on average by the first quarter of 2023, according to data compiled by Bloomberg, a stark contrast to calls that 140 and above await at the peak of the drop in mid-July.
An end to what was threatening to become the currency's worst-ever decline would be welcomed by businesses to consumers to politicians in Japan, as high import costs weigh on the post-pandemic recovery. It would justify the resolutely hawkish stance of BoJ Governor Haruhiko Kuroda and put pressure on hedge funds that came late to the popular macroeconomic strategies for the short-term yen.
The Japanese yen is closely correlated with moves in US government bonds, as the dynamic of the Bank of Japan keeping interest rates on hold even as the Federal Reserve raises significantly is weighing on the relative attractiveness of Japanese assets. Treasury yields have now slipped from their highs as traders adjust their estimates of peak US Federal Reserve interest rates and reconsider bonds on fears of a US slowdown.
"The monetary policy divergence between the US and Japan won't be a factor anymore, as the markets have largely priced that," said Yukio Ishizuki, senior forex analyst at Daiwa in Tokyo. It appears that the selling of the yen has reached its climax.
Benchmark Treasury yields have fallen more than 60 basis points from their June peak to 2.82% on Monday. The yen strengthened more than 3% from its low to around 135.25. “It follows that if the trend of US yields is less than some of the upside pressure that is removed from the currency pair,” said Jane Foley, an expert at Rabobank in London. It expects USD/JPY to trade as low as 130 in the coming months.
It left Japan, a net oil importer, reeling earlier this year as Brent crude futures rose around $140 a barrel. With prices now below the $100 mark, the devastating impact on import costs has eased. Accordingly, Yuki Masujima of Bloomberg Economics predicts that Japan's trade deficit narrowed in July and that the country's import bill increased at a slower pace thanks to cheap commodity prices.
Japanese currency is also re-emerging as a safe haven.
The yen jumped 1.3% last Monday when investors learned that US House Speaker Nancy Pelosi would visit Taiwan, raising fears of possible retaliation from China. It has risen more than 4% in the past three weeks as fears of a global recession deepen. "It looks like the Japanese yen has rediscovered its safe haven status," said David Forrester, senior FX analyst at Credit Agricole CIB in Hong Kong. He added that weaker-than-expected US economic data limits US interest rate hike bets, which "reduce the safe-haven dollar with a high-yield attractiveness, allowing the Japanese yen to reconfirm its appeal as a safe haven."
Hedge funds seem to be voting with their feet. Recent data from the Commodity Futures Trading Commission showed that leveraged investors cut their negative bets on the yen to the lowest level since March 2021.
Forecast of the dollar against the Japanese yen:
The price of the USD/JPY currency pair may remain stable around its recent gains until the US inflation figures are announced, which complete the picture for the US economy and the path of raising US interest rates. Currently, the nearest resistance levels for the dollar pair are 135.85, 136.20 and 137.00, respectively. On the other hand, on the daily chart, a break of the support 132.25 will be important for the bears to control. The general trend of the dollar-yen is still bullish.
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