Trade of the Week: Yen bulls to clap back?

• JPY is G10's best-performer today, also month-to-date
   
• Yen climbing on creeping bets for imminent Bank of Japan hike
   
• Tuesday's US inflation release will feed market's main obsession
   
• Friday's Japan wage negotiations results are key for BoJ
   
• Bloomberg forecast: USDJPY to trade between 144.48 – 148.65 this week

 

The Japanese Yen is already off to a strong start this week!

Not only is it the best-performing G10 currency against the US dollar today, but also for the month:

• So far today (Monday, March 11th): USDJPY is down 0.24% at the time of writing
   
• So far this month: USDJPY has fallen by 2.2%

NOTE: USDJPY goes down when the Japanese Yen strengthens against the US dollar.

 

Why is the Yen climbing?

Markets are starting to restore hopes, once again, that the Bank of Japan (BoJ) is now (finally? truly?) ready to trigger a rate hike.

Markets had previously made similar predictions in recent years past, only to be left sorely disappointed when the BoJ left its rates unchanged, even as other major central banks raised their own rates aggressively in recent years.

Keep in mind that the BoJ is the last central bank to still adopt a negative interest rate regime, keeping its rates at -0.1%.

At present, markets are forecasting the following:

• 65.7% chance of a BoJ rate hike at its March 19th policy decision
   
• 86.4% chance of a BoJ rate hike by its April 26th policy decision

NOTE: A currency tends to strengthen when its central bank is perceived to be raising its benchmark rates.

 

However, JPY bulls (those hoping the Yen will strengthen) have a lot more ground to cover before their pride can be fully restored.

After all, the Yen has endured a torrid time in recent years.

JPY has been the weakest G10 currency against the US dollar in 2 out of the past 3 years.

 

Events Watchlist

This week, two key events could determine whether Yen bulls can get some much-needed ammo to stand up to their critics:

1) Tuesday, March 12th: US February inflation data

Here are the economists’ forecasts for the February consumer price index (CPI), which is used to measure headline inflation growth:

• Headline CPI year-on-year (February 2024 vs. February 2023): 3.1%
  If so, this would match January’s 3.1% year-on-year number
   
• Headline CPI month-on-month (February 2024 vs. January 2024): 0.4%
  If so, this would be higher than January’s 0.3% month-on-month number
   
• Core CPI (excluding food and energy prices, which are more volatile) year-on-year: 3.7%
  If so, this would be lower than January’s 3.9% month-on-month number
   
• Core CPI month-on-month: 0.3%
  If so, this would be lower than January’s 0.4% month-on-month number
   

Why does this matter?

The Federal Reserve (US central bank) has a mandate to subdue red-hot inflation since the pandemic, which it has done so by aggressively hiking US interest rates in recent years.

Markets want to know how soon could this battle against inflation be over, and when the Fed can begin to return US rates to lower, and more “normal” levels.

This guessing game has been the market’s primary obsession in recent years.

This sets up every monthly CPI data release as arguably the most important piece of economic data for investors and traders worldwide.
 

Potential Scenarios:

• Overall, if the US inflation data come in below market expectations, that should pave the way for the Fed to lower its benchmark rates in the months ahead.
  
  Such expectations should weaken the US dollar, while dragging USDJPY lower.
   
• However, if the US inflation data exceed market expectations, that may further delay a Fed rate cut.
  
  Such expectations should support the US dollar, while potentially prompting USDJPY to unwind some of its recent losses.

 

 

2) Friday, March 15th: Japan wage negotiations results

Japan’s largest union group, Rengo, is set to announce the results from its annual wage negotiations.

On average, workers unions are demanding for a pay hike of 5.85% this year – its largest raise since 1993.

For comparison, a year ago, these unions demanded for an increase of 4.49%.
 

Why does this matter?

Higher salaries would imply stronger spending power among Japanese consumers, which could support inflationary pressures (business can raise prices sustainably).

The Bank of Japan wants to see sustained inflation, despite the headline CPI having exceeded its 2% target since April 2022.

A massive pay hike for Japanese workers could help underpin the country’s inflation outlook while likely paving the way for the long-awaited BoJ rate hike.

Potential Scenarios:

• If Rengo announces that it secured a higher-than-expected pay raise, that could deliver a massive boost to the Yen.
   
• However, if Rengo disappoints Yen bulls and the BoJ with its wage negotiation results, that may pull JPY back lower, while sending USDJPY back closer to recent heights.

 

 

Key levels

According to Bloomberg’s FX forecast model, USDJPY is expected to trade within the 144.48 – 148.65 range this week.

Potential resistance:

• 147.20 region: key battleground between bulls and bears since August 2023

• 100-day SMA
   
• 148.00 – 148.65: price region which includes psychologically-important level and the upper bound of Bloomberg’s forecasted range

 

Potential support:

• 200-day SMA
   
• 145.00: psychologically-important level
   
• 144.48: notable battleground between bulls and bears since 2022 / lower bound of Bloomberg’s forecast model

 

Watch for technical rebound

Note that USDJPY's 14-day relative strength index (RSI) is already flirting with the 30 level.

When the 14-day RSI hits or goes below 30, that meets the textbook criteria for "oversold" conditions.

Recall how USDJPY experienced such a technical rebound was seen when the RSI last hit 30 back in December 2023.

Hence, further declines this week may once again trigger another short-lived technical rebound for USDJPY.

 

 

USDJPY Japanese Yen Bank of Japan BoJ inflation Federal Reserve rate hike negative interest rates