Japanese yen starts looking cheap
It is hard to choose between “don’t catch falling daggers” and “buy what is cheap”. It is not reasonable to go against the crowd, but if the majority were always right, the Sun would still go around the Earth. Looking at how high the USD/JPY pair is climbing, I have a feeling that it will be hard to find an asset, more appealing that the Japanese yen in 2019-2020. It is remarkable that the large banks, surveyed by Bloomberg, share the same opinion. According to their consensus forecast, dollar should cost ¥105 in late 2020. At best, it will be at ¥113, at worst - ¥94.
Dynamics of USD/JPY
In my opinion, there are at least three drivers, suggesting bullish long-term outlook for the yen: lower global risk appetite, trade wars and changes in monetary policies. According to OECD, pressed by protectionism, global economic expansion can slow down to 3% and lower in 2020. In the same year, the U.S. may face a recession. Lower rate of global GDP growth is only one of the reasons for global stock indexes correction. Others include lower corporate income and higher borrowing costs.
U.S. corporate earnings growth is down at 7% in the third quarter, from 13.7% in the second one. In the first quarter the indicator was as high as at 15.6%. 58% out of 110 Reuters experts believe that the stock market bullish trends either have ended or should end in the next 12 months.
According to Jerome Powell, there is just one hike left to reach the neutral rate. In 2019, other central banks will also tighten their monetary policies Borrowing costs will be growing, stock indexes and risk appetite will be going down; therefore, safe-heaven assets are going to be quite popular.
The USD/JPY rally was supported by the US-China trade wars in 2018. Investors were discussing the fact that the dollar took the safe heaven status from the yen. I, personally, assume that the dollar was strengthening mainly because of the pending effect of protectionism on global economy, along with the gaps in economies’ growth and monetary policies. Boosted tariffs on the China’s imports will hit global trade and GDP. Investors will have to recall the Asian safe heaven.
U.S. trade war with China
Changes in the monetary policies will become another strong driver for the USD/JPY drop. According to Mizuho Bank, the pair rate may drop down to the level of 100 in late 2018 even if the Bank of Japan won’t introduce any changes in its current monetary policy. It is more important that the Fed should stop hiking the interest rate and investor are going to take the profit for the dollar. Morgan Stanley and Commerzbank expect the greenback to hit ¥94-96 in late 2020 amid the start of BoJ monetary normalization. Rabobank believes that the yen growth won’t be so fast: if the Federal Reserve stops increasing the rate, the dollar weakening will hinder normalizing monetary policies in other countries.
Is there really a point in catching falling dagger or going against the crowd? But for the heretics, sentenced by the crowd, the world would be different now. In my opinion, if the supports at 112.8 and 112.3 are broken out USD/JPY may be sold further.
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Price chart of USDJPY in real time mode
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