Insights

USDJPY and the bank of the rising sun

By Paul Reid

18 March 2024

bank of the rising sun

Recent data from the Fed and the BOJ suggests a tempest is brewing for USDJPY.

The latest reports show that the balance between US inflation and employment is swaying unpredictably and retail sales are not keeping pace.

Meanwhile, Japan’s Nikkei 225 (JP225) has surged to a three-month high, fueled by optimism about corporate profits. Recent labor negotiations have also shown promise, with some major companies offering solid pay hikes, potentially reversing years of wage stagnation.

Additionally, a recent revision of economic data revealed that capital spending grew more than previously estimated, hinting at increased business investment. But does Japan’s growth compare to America’s publicized strength?

Offsetting US weakness

Is America walking on thin ice? The big question on several economists’ and analysts’ lips is why USD and US-related assets are holding strong, even though US inflation is stubbornly high, interest rates are volatile, and US debt, both international and domestic, is on the rise.

Commodities, once the stabilizers in our economic vessel, have turned traitorous. Prices for essentials like oil, copper, and lumber are rising, creating a ripple effect that’s affecting everything from transport costs to consumer goods.

And in the middle of this maelstrom, the Fed, the market’s unofficial lighthouse, seems to be lost in a financial fog. Initially expected to cut rates seven times in 2024, now the forecast is a mere three. Could this indicate a hidden undercurrent in the US economy, perhaps a deeper issue that we're not seeing or hearing about…yet?

On the global stage, the US is still the largest economy in the world and a nexus for all trade, but within its borders, millions of Americans are economically struggling. The balancing act of stabilizing the US dollar in the face of global currency fluctuations has led to increased costs for American citizens through a series of indirect but interconnected mechanisms.

Higher interest rates, while aimed at controlling inflation and supporting USD, have increased borrowing costs and affect everything from mortgage payments to business loans, directly impacting consumer spending and economic growth. Keeping the throne as an international commerce and trade leader is coming at a great cost to Americans, but all that might be about to change.

Early indicators put a Republican in the White House this November. What we are looking at right now could be likened to a person on a ledge hanging by their fingertips – every rate hike and quantitive easing being nothing more than a misdirect, keeping the economy afloat until the change of leadership takes hold. If the US economy crumbles after November, all fingers will point to Trump as the scapegoat.

But keep in mind, whatever chewing gum and paperclips are holding the US economy together right now will be used by the Republicans too, so a market sentiment shift might not happen when everyone is expecting it.

JPY is positioned to be a safe haven in 2024

So if USD is going down with the US economy, why pair off favoring yen? JPY, which has been following a losing trend since December 2020, may well present as a Buy opportunity if it regains its haven asset status in 2024, especially since it is currently considered to be wildly oversold and undervalued. 

Now add a turbo boost from the Bank of Japan (BoJ). Almost every economist agrees that it is now highly likely that the BoJ will raise interest rates very soon, possibly even by the time you read this.

Financial markets are anticipating a rate hike in March 2024, with some analysts even predicting it could have happened earlier. The BoJ itself has been increasingly signaling a shift in policy, with comments from board members suggesting they view conditions for raising rates as being met.

Inflation in Japan is rising, and strong wage hikes are being seen, which are factors that would traditionally lead to tighter monetary policy. If the BoJ does raise rates, it would be the first time since 2007. It would be a significant change for the Japanese economy. And we all know what happens to a currency when a central banks raises rates.

Conclusion

The Japanese economy was in fact healthier than projected, and JPY is said to be both overbought and overvalued. The Nikkei is strong, business looks good, and a rate hike is likely just around the corner.

Meanwhile, the US is juggling resources as it faces rising poverty, civil discord, political fracturing, rising debt, and a world edging towards de-dollarization.

If these speculations prove to be correct, US-related assets might not move much in the coming weeks and months, but this November, we might be looking at the bottom falling out of USD as the next presidential elect is sworn in.

Indirectly, the threat of such a historic crash may well trigger institutional investors to move their wealth early, which could mean more bullish price actions for digital assets as well as gold.

JPY, which is priced low after following a losing trend since December 2020, may soon present as a Buy opportunity too, especially if it regains its haven asset status. Early signs are appearing that a BOJ interest rate rise is coming, which typically triggers buy volume. Moreover, JPY is currently considered to be wildly oversold and undervalued, so keep a close eye on the BoJ, especially as the US election day approaches.

If you are planning to trade USDJPY or JP225, keep in mind that the overall markets are not behaving traditionally. Market reactions to such mechanisms as interest rate hikes are well known, and even expected, but never guaranteed. Trading such volatility presents a risk of stop out when equity is low and leverage is high. Make sure your order size doesn’t compromise your risk management strategy.

It’s going to be a wild ride, timing is paramount, and there will be a lot of noise and no support from indicators. Be vigilant, stay ready, and trade cautiously.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.