USD/JPY Weekly Forecast: Fundamental and technical alignment for the dollar
|- Federal Reserve and Bank of Japan rate policies officially diverge.
- USD/JPY reaches five-year high at 119.40 after breaking 116.35 last Friday.
- BoJ’s Kuroda endorses a weaker yen and continued monetary support.
- FXStreet Forecast Poll predicts a technical retreat in USD/JPY.
The Bank of Japan confirmed on Friday what the market has known for some time–the yen will receive little or no support from domestic rate policy in the near future. With the modest yen benefit of the safety-trade in abeyance since last week and the four-year resistance at 116.35 breached, the USD/JPY rose 1.7% this week, capping a 3.9% surge in the last eleven trading sessions.
Japan’s overnight cash rate remained at -0.1%, where it has been for six years, after the Bank of Japan (BoJ) meeting on Friday. The Japanese base rate was at 0.1% from December 2008 to January 2016 and has been -0.1% thereafter.
Bank of Japan overnight cash rate
“Monetary easing is needed to support Japan's economy halfway through recovery from the pandemic,” said BoJ Chief Haruhiko Kuroda in his press conference after the rate decision.
In a comment that could stand for a generation of failed Japanese monetary policy Mr. Kuroda observed, “Thinking that a weak yen is negative for Japan's economy is wrong.”
Currency markets will certainly note the BoJ’s devotion to a mercantilist policy that focuses on reducing the overseas cost of Japanese exports.
In contrast, the Federal Reserve increased the fed funds rate for the first time since December 2018 making official what has been apparent for several months, the policy response to the pandemic is finished. After two years of zero rates, a doubling of the Fed’s balance sheet to $9 trillion and record low Treasury yields helped to produce the highest inflation in 40 years, the governors finally wrote finis to monetary stimulation, without acknowledging their own role in it.
The Federal Open Market Committee (FOMC) increased the fed funds upper target 0.25% to 0.5%. In the accompanying statement, the FOMC said the committee expected to begin reducing the bank’s balance sheet at a coming meeting. The vote was 8 to 1 with James Bullard, President of the St Louis Fed backing a 0.5% increase.
Fed funds rate
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Federal Reserve Chair Jerome Powell said in the press conference following the meeting, that the plans for the balance sheet were well advanced and the reduction could start soon, perhaps at the next FOMC meeting in May.
In addition to the rate increase, the bank's quarterly Projection Materials anticipated six more rate increases this year with a median estimate for a 1.9% base rate at year-end. The December 2021 projections had three hikes to the end of the year and a 0.9% fed funds rate.
Japanese annual national inflation nearly doubled to 0.9% in February, the highest it has been since April 2019. Exports were stronger than predicted for the year in February and Imports were slightly weaker. Industrial Production fell 0.8% in January and 0.5% on the year, both, less than forecasts.
Aside from the Fed decision which dominated the week’s information, US inflation continued its upward march. Annual producer prices rose a record 10% for the second month in a row in February, ensuring further consumer increases. Retail Sales in February at 0.3% were a bit below the 0.4% forecast but January's performance was sharply upgraded to 4.9% from 3.8%. The Control Group, which mimics the consumption component of GDP, fell 1.2%, much worse than the 0.4% estimate, but here also the January revision to 6.7% from 4.8% more than covered the difference. Jobless Claims dropped to 214,000 in the March 11 week with the four-week moving average at 223,000, indicating an exceptionally tight labor market.
Treasury yields continued to widen their spread over Japanese Government Bonds (JGB). The return on the US 10-year note had added 15 basis points on the week to 2.151% to early Friday trading. The 10-year JGB yield rose 2 points to 0.205%.
USD/JPY outlook
The classic predictor for currency values is central bank interest rates. That measure has moved decisively in the dollar’s favor. The enormous disparity in inflation between Japan and the United States and the necessary policy response could see the yield curve disparity between Treasuries and JGBs widen by 100 to 150 basis points by the end of the year.
Japan’s economy has been underperforming for many years and that gap versus the US will continue regardless of whether the both countries and the world fall into an inflation and scarcity-induced recession this year. The energy price shock now reverberating through the global economy will impact Japan with greater force as nearly all her energy is imported.
Tokyo's annual Consumer Price Index (CPI) for March due on March 25, is expected to jump 50% to 1.5%, but with the BoJ on seemingly permanent hold, it is irrelevant to policy.
For the US, Durable Goods will confirm the moderate February Retail Sales numbers but will have no market effect.
Technically, 116.35 was the last substantive resistance and its decisive crossing on March 11 and strong follow higher has opened the levels above to the 2015 high of 125.00.
An escalation of the Ukraine conflict could reignite the yen safety-trade but it would have to be of nearly catastrophic nature to overcome the fundamental and technical biases towards the dollar.
The USD/JPY outlook is higher.
Japan statistics March 14–March 18
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US statistics March 14–March 18
Japan statistics March 21–March 25
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US statistics March 21–March 25
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USD/JPY technical outlook
The MACD (Moving Average Convergence Divergence) opened its greatest positive divergence in at least two years as the ascent through the four-year high at 116.35 obviates short positioning and the Federal Reserve's tightening policy looks to accelerate once and if the Ukraine war is settled. The MACD bias is higher. The Relative Strength Index (RSI) entered overbought territory last Friday and remained there all week. Because interest rate fundamentals play a large part in USD/JPY strength, the overbought status is not an immediate sell signal.
Four-year old resistance levels will not receive much attention from traders and price action will be needed over the coming sessions to establish pertinent resistance levels. Average True Range (ATR) volatility climbed to its highest in over a year as the USD/JPY broke out at 116.35. Volatility will subside over the next few days as the USD/JPY formulates resistance and support levels.
The resistance line at 119.40 is simply the high on Friday March 18. The lines at 120.00 and 121.00 cite the USD/JPY spike in the first week of February 2016, and are reference points rather than competent resistance. Moving averages (MA) have been left behind by the rapid ascent.
Resistance: 119.40, 120.00, 121.00
Support: 118.72, 118.50, 117.25, 116.15 (21-day MA) 116.17) 115.60,
Moving Averages: 21-day 116.17, 50-day 115.42, 100-day 114.79, 200-day 112.70
FXStreet Forecast Poll
The uniform bearish outlook in the FXStreet Forecast Poll is a technical reading of the current USD/JPY position.
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