Will Yen Surprise? Forecast as of 06.03.2023

Will the Bank of Japan repeat its December hat trick？ Then, unexpectedly for investors, it expanded the range of target bond yields. USDJPY reacted with a fall. What will happen this time？ Let us discuss the Forex outlook and make up a trading plan.

The Japanese Yen (JPY), is weighed down by expectations that the Bank of Japan (BoJ) will stick to its dovish stance for the foreseeable future. In fact, the incoming BoJ Governor Kazuo Ueda stressed the need to maintain the ultra-loose policy to support the fragile economy and said earlier this week that the central bank isn't seeking a quick move away from a decade of massive easing. Some analysts, however, still expect that the BoJ could further widen its yield tolerance range or even abolish the yield curve control scheme altogether. This, in turn, holds back bullish traders from placing aggressive bets around the USD/JPY pair and capping gains.

Weekly yen fundamental forecast

Although Haruhiko Kuroda at the end of his term continues suggesting the need for an ultra-easy monetary policy, investors do not exclude that the Bank of Japan will expand the target yield range of 10-year bonds in March. So it was in December, despite the dovish stance of the BoE governor. Why shouldn't history repeat itself？ Expectations of a hawkish surprise from the BoJ encourage the USDJPY bears even amid strong demand for the US dollar.

For a long time, Haruhiko Kuroda pursued an ultra-easy monetary policy, including negative interest rates, QE, and yield curve control. However, global trends are as follows: the highest inflation in a decade is forcing central banks to raise interest rates aggressively, and the chance of monetary normalization in Japan are also rising. According to Bloomberg experts, the new governor of the BoE, Kazuo Ueda, will make adjustments to monetary policy at the second meeting, in June.

Forecast of BoJ monetary policy adjustments

As for March, 46 out of 49 experts polled by the popular edition do not see any policy changes. Morgan Stanley MUFG Securities sees a 20% increase in the target yield range for 10-year bonds, citing that the need for a stronger yen is now lower than it was in December.

Financial markets are more serious about a possible surprise from Haruhiko Kuroda. 10-year bond yields are testing the upper limit of the +/-0.5% trading range, and the risk reversals indicator, the ratio of premiums on call and put options on USDJPY, has reached its lowest level since October.

Dynamics of USDJPY risk reversals

Thus, the USDJPY decline us fuelled by fears that Haruhiko Kuroda will decide to make adjustments to monetary policy, thus making the job for his successor. Unless it happens, the pair is likely to go up.

In favor of the continued rally of the US dollar against the yen is the widening yield gap between US and Japanese bonds, a lower probability of a recession in the United States, as well as Japan's still weak current account. Despite the strengthening of the local currency, the cost of imports is still high.

Weekly USDJPY trading plan

The USDJPY trend will certainly be affected by the US jobs report for February and Jerome Powell's speech before Congress. Amid higher PCE, the Fed Chair simply has to be a hawk. At the same time, a slowdown in employment to 215,000 is fraught with the end of hopes for an increase in the federal funds rate to 6%, which will weaken the US dollar. With no surprises from BoJ, the pair could go up to 136.7 and 138 and the crash. In this regard, it makes sense to sell the dollar versus the yen on the price growth.