If the Fed starts cutting interest rates in 2024, it will be profitable to sell the USDJPY. The BoJ monetary normalization will support the yen. Let us discuss the Forex outlook and make up a trading plan.
Monthly Japanese yen fundamental forecast
The Forex market is constantly changing. The Japanese yen could well become a winner in 2024 following a losing streak this year. While the Fed and other regulators will ease monetary policy, the Bank of Japan will face the need to normalize it. As a result, the Japanese yen could become the G10 best performer.
Since the beginning of 2023, the USDJPY value has increased by almost 14% due to divergence in the monetary policies of the Fed and the Bank of Japan. While Jerome Powell and his colleagues have been talking about the possibility of further increases in the federal funds rate until recently, Kazuo Ueda adheres to the mantra of the need to maintain an accommodative monetary policy until inflation reaches the 2% target on a sustainable basis. Nobody knows what exactly it means because the CPI has been exceeding 2% for more than a year.
Dynamics of federal funds rate and USDJPY
Source: Bloomberg.
The BoJ governor attributes the persistence of inflation to the earnings data. Still, in his last speech to parliament, Kazuo Ueda said the central bank would not wait for real wages to turn positive. His tone is changing, and this suggests that monetary normalization could start soon.
In fact, the BoJ monetary policy is being normalized. First, the Japanese regulator expanded the target yield range to +/-0.5%, then to +/-1%, and then announced flexible regulation. With Kazuo Ueda saying that a weak yen is not only bad for the economy due to rising import prices but also good for exporters and corporate profits, it would appear that he is following in the footsteps of his predecessor. Haruhiko Kuroda has repeatedly argued that the USDJPY rally is positive for the economy. However, there are differences in the speeches of the current and previous heads of BoJ.
According to PIMCO, the Bank of Japan has no choice but to normalize monetary policy. And this gives the company reasons to buy yen against major world currencies. If the Fed, ECB, and Bank of England cut rates by 100 basis points in 2024 and the BoJ starts raising interest rates, the dollar, euro, and pound will weaken versus the yen.
A narrowing US-Japan bond yield spread suggests the USDJPY trend is to turn down.
Dynamics of USDJPY and US-Japan bond yield spread
Source: Bloomberg.
The process could be triggered by the overly inflated yen shorts. In the week ended on November 14, hedge funds increased their net short positions to the highest level since April 2022. Their unwinding will lead to a sharp drop in USDJPY.
Monthly USDJPY trading plan
Thus, the yen strengthening against the US dollar in early November could be a trend reversal. The targets for USDJPY shorts at 148.7 and 147.8 could be moved to 146 and 142.5. I recommend selling.
Price chart of USDJPY in real time mode
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