The Bank of Japan's policy meeting, combined with the government's currency interventions, has tempered USD/JPY bulls twice. Will history repeat itself in June? Perhaps, if the BoJ refrains from raising rates. Let's analyze the situation and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Disappointment with the BoJ will trigger a surge in USD/JPY quotes.
- The risk of currency interventions may increase.
- The yen's position is better than it was a month ago.
- A break above 160 followed by a pullback below that level is a reason to sell the USD/JPY pair.
Weekly Fundamental Forecast for Yen
If something happens once, it may never happen again. However, if it happens twice, it is bound to happen a third time. Just as in 2024, Japan intervened in the Forex market at the end of April and beginning of May, immediately following the BoJ meeting and the resulting decline in the yen. The central bank disappointed, and the government was forced to intervene to stop USD/JPY bulls. As the June Board of Governors meeting approaches, there is a sense of déjà vu.
The futures market indicates a 75% probability of an overnight rate hike at the Bank of Japan's first summer meeting. However, the latest data on slowing inflation could allow doves to convince the rest of the BoJ officials of the need to continue the pause in the monetary tightening cycle. If that happens, the USD/JPY pair will likely surge above the psychologically important 160 level.
Speculative Positions on Japanese Yen
Source: Bloomberg.
Speculators are counting on this scenario. Hedge funds and asset managers have increased their net short positions in the yen to their highest levels in nearly two years, despite all the government's warnings. As a result, Satsuki Katayama has resumed verbal interventions. The finance minister stated that the authorities were ready to take decisive action if they observed increased volatility or signs of speculative activity in the Forex market.
At the turn of April and May, Japan spent ¥11.7 trillion on currency interventions. The amount exceeded the market estimate of ¥10 trillion and sparked rumors that there may have been more than two interventions within a short period. If so, they could resume before the USD/JPY pair reaches the 160 level.
USD/JPY Rate and Interventions on Forex
Source: Bloomberg.
In reality, currency interventions are merely a way to buy time, not a turning point. Although the yen is currently trading at the same levels as in early May, the fundamental outlook is far more favorable for it now than it was then. The conflict in the Middle East is about to end, and oil prices will likely fall, benefiting Japan—a net importer of crude oil—more than the US. At the same time, the Fed will have less reason to raise the federal funds rate, and demand for the dollar as a safe-haven asset may decline.
All of this, combined with excessively inflated speculative positions on the yen, allows Eurizon SLJ Capital to forecast that the upward trend in USD/JPY quotes will reverse. It is quite possible that the authorities will not need to buy more time, especially if the Bank of Japan meets expectations and raises the overnight rate to 1% in June.
Weekly USDJPY Trading Plan
While in April and May I suggested buying the USD/JPY pair following currency interventions, such interventions could now reverse the uptrend. If the price pierces the 160 level, and a sharp downward move follows, short positions can be considered.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
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