A decline in global risk appetite will press the USD/JPY down

An impressive start of global stock indexes in 2019 discouraged the yen fans. After the flash crash in January, it became the major leader of the G10 currencies, however, the intentions of the Fed and other central banks of the advanced markets to be patient, the progress in the US-China trade talks and the renewed interest in carry trades sent the yen down. If Goldilocks economic conditions, favorable for emerging markets, remains, USDJPY is likely to continue rising. After all, investors seem to be over confident in this. And the market often penalized for this. According to Morgan Stanley, investors’ blind faith in the scenario, when the low inflation and the central banks’ patience should support the recovery of global GDP growth, engages high risk. A new round of trade wars and (or) bad corporate reporting of the US businesses will sent the S&P 500 down in a correction and hold back carry traders. Goldman Sachs believes that the signs of monetary normalization by the Bank of Japan and a worse global risk appetite will press the USDJPY down to a level of 108.

The course of negative interest rates used to be an innovation, however, it was not effective in Japan. The inflation is rather far from its 2% target. And there are more and more talks about the return to normal interest rates. When the yield is below zero, the loan payments are to be paid by investors, and the fiscal discipline is thereby violated. The banks struggle to make money and the borrowers are unwilling to take loans for business investments, as they are confident that their cost will be much less later. As a result, the GDP rate is pressed down. In this situation, monetary normalization looks to be necessary. Nonetheless, as the BoJ is concerned that it will strengthen the yen, Bloomberg experts suggest that the monetary easing is more likely in the near future than tightening.

Forecast for the BoJ future monetary policy

Source: Bloomberg

None of 46 Bloomberg respondents expects that the central bank will change the monetary policy at the meeting on March 15; so the USD/JPY is getting more likely to soar in case of a surprise. Taking into account busy for the US dollar economic calendar and the yen sensitivity to the Treasury yields, the reports on durable goods orders, inflation changes and industrial production may also move the USD/JPY rate quite a lot.

In the medium term, the key driver for the yen price changes, in my opinion, will be global risk appetite and the interest in funding currencies for carry trades. According to Bloomberg Economics, global growth should be down from almost 4% to 2.1% in the first quarter, with the subsequent restoration in the April-June period. That is why, I’m still sticking to my prior forecast for the USD/JPY consolidation in the range of 108.5-112.5 and the recommendation to sell the pair on the rise towards its top border.

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Price chart of USDJPY in real time mode

Markets are to give yen second chance

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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