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Forming positions in USD/JPY based on the release of the US inflation data

 

Japan is an independent country. Nothing depends on it. There is a joke in every joke, the rest is true. And the fact that the yen's rate is determined not by macroeconomic statistics in the Land of the Rising Sun and not by the actions of the BoJ, has been known for a long time. The yen reacts sensitively to the external background and events occurring in the US, so Forex has opted to ignore rumors about the appointment of Haruhiko Kuroda as governor of the Bank of Japan for a second five-year term and focused on the worsening global appetite for risk.


Kuroda can boast the longest economic expansion of the Land of the Rising Sun since the 1990s, although it has not been possible to achieve the main task - the inflation target. The 73-year-old banker believes that any talk about withdrawing from the ultra-soft monetary policy is premature. While he was in power, the balance of the regulator swelled to ¥549 trillion ($5 trillion), and in relative terms significantly exceeds European and American counterparts. The BoJ owns 40% of the total number of placed government bonds.


Dynamics of central bank balances, as % of GDP

Source: Bloomberg.

 

Fixed-term contracts bet on the 80-90% chance of the current head of the central bank's term to be prolonged, and investors believe that this news should calm the markets. However, we see nothing alike: despite the rebound of the S&P500 from corrective lows, the USD/JPY has collapsed to the very bottom of the last 5 months.


Formally, the rollbacks of TOPIX, Nikkei225 and the decline in US Treasury yields should be considered as the main reasons for the strengthening of the yen, although in fact we need to dig deeper. The yen is the main funding currency and a safe haven, so a deterioration in global appetite for risk and rising volatility create a favorable ground for the USD/JPY bears. Under such conditions, carry traders flee from the ship like rats, and rumors circulate in the market that the Goldilocks mode for profitable currencies is a thing of the past.


Central banks are on the road to normalizing monetary policy, and even if the BoJ claims that it is not going to do the same, liquidity will leave the market and the cost of borrowing will increase. These factors create a solid foundation for the growth of volatility.


Dynamics of USD/JPY and VIX fear index

Source: Reuters.

 

USD/JPY are also not supported by the factor of Donald Trump. The US President once again spoke about the need for import duties, which increases the risks of antiglobalism, the slowdown in world trade and GDP. And in such conditions, investors prefer to increase the share of reliable assets in their portfolios.


After lightly touching the level 110 announced in the previous material, the pair went down sharply and expects the release of data on US inflation for January. The sluggish dynamics of the indicator will calm the stock indices and will promote the dollar's recoil to ¥108.2-108.9. In contrast, the CPI acceleration will resume the correction of the S&P500 and a downtrend in USD/JPY.

Yen has put carry trade in check

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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