Previously, we had initiated a short-sell position on the USD/JPY currency pair, the rationale for which can be read in the article ‘USD/JPY: Short’.
Given the escalation in the global energy crisis, inflationary pressures persisting and US/Japan specific conditions, we are updating this recommendation to a hold position, as we explain now:
US
A survey, published on Saturday 17 September in a collaboration between economist from the Financial Times and the Initiative on Global Markets, has suggested the FED is not prepared now or in the near future to consider tighter monetary policy. The current Federal Fund Rate sits between 2.25% and 2.50%, however almost 70% of the economists believe it will peak at roughly 4%-5%. Not only is the hiking a factor, but the consensus is that the FED will keep rates hiked past 2023.
The energy crisis in Europe has indeed escalated, with Nord Stream 1 supply standing stationary at 0% capacity. Political tensions are mounting as a result, but the bigger issue on hand is the persistence of inflation which the crisis is exacerbating. With the FED and major central banks now focusing solely on inflation, it seems reasonable to assume interest rates will continue to rise, past expectations.
What this means for our USD/JPY position, is that higher interest rates will further appreciate the dollar, and so the currency pair will rise further. If the FED does hike 75bps in the next meeting, which is the current minimum estimation, we may see a slight pullback in the USD/JPY pair, which recently hit a resistance of 145. However, given the time-scale over which the hiking is predicted to last, we have further evidence to suggest the pair will break the 145 mark.
Japan
However, despite this, we do not recommend a long position. This is because speculation of a BoJ intervention has increased amongst investors. On 14 September, it was reported that the BoJ conducted a rate check, which could be pre-emptive of an intervention by the BoJ, to support the falling Yen. On news of this, the Yen rallied, with the USD/JPY pair falling 0.8%.
As mentioned in our previous article, intervention by the BoJ would be supportive of a short position for the currency pair, as market reactions implied as well. It seems the Yen has reached a severely depreciated point, where intervention is needed.
Conclusion
We are presented, therefore, with conflicting evidence for the future of the currency pair. If there is an intervention by the BoJ, we will see the short position profiting, however the FED interest rate hiking cycle is supportive of a longer timeframe. Therefore, we will most likely see a fall and then a consequent rise in the pair, however the timing is especially hard to judge given the minimal evidence of intervention. Therefore, we believe a hold position is the best option at the moment.