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USD/JPY Fundamental Weekly Forecast - Traders Bracing for BOJ Intervention, but Not Too Concerned

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As far as the Dollar/Yen is concerned, Inflation and interest rate watchers may want to step aside this week because in my opinion the key event to monitor is the possible intervention by the Bank of Japan.

Last week came and went with US consumer inflation running red-hot in September and market expectations for another 75-basis-point rate hike by the Federal Reserve in November sitting at about 97%.

That was good enough to send the Dollar/Yen well above its 32-year high and good enough to reaffirm that the divergence in monetary policy between the US Federal Reserve and the Bank of Japan (BOJ) is driving the price action, not currency manipulation .

The Fed is hiking rates and the BoJ is holding rates steady. That’s all traders care about at this time. Sure an intervention to support the Yen could cause some short-term weakness, but it will be absorbed just like the one in September.

This is because the current move is being driven by real buying due to the widening interest rate differential between US Government bonds and Japanese Government bonds is widening. This makes the US Dollar a more attractive asset.

If it were all about speculation, traders would head for the hills following an intervention. Instead of saying, thank you Bank of Japan, I can now add to my bullish position.

Last week, the USD/JPY settled at 148.758, up 1.529 or 1.04%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) finished at $62.82, down $0.62 or -0.98%.

BOJ Gets Little Help from G-7 Nations

Japan and other countries facing the fallout from a soaring US Dollar found little comfort from last week’s meetings of global finance officials, with no sign that joint intervention along the lines of the 1985 “Plaza Accord” was on the horizon.

This means the BOJ will have to go it alone and I don’t think they’ll be willing to spend the money to change the trend. The trend could change on the price charts, but the long-term uptrend is likely to remain intact.

Over the weekend, St. Louis Fed President James Bullard acknowledged the Fed’s rapid interest rate increases have contributed to the strength of the dollar against other currencies, but he also added that the strength in dollar may ease once the US central bank reaches the point of pausing the hikes.

But when is that likely to occur? The Fed’s policy rate is currently 3%-3.25%. By year-end, traders now expect the rate to reach 4.5%-4.75% — the level Fed policymakers had just three weeks ago seen taking until next year to reach – and topping out around 4.85% by March of next year.

Some traders are calling for the terminal rate to reach 5% to 5.25%.

Weekly Outlook

The promise by the finance leaders of the Group of Seven advanced economies to keep monitoring “recent volatility” in markets along with Japanese Finance Minister Shunichi Suzuki’s threat of another yen-buying intervention, failed to prevent the currency from sliding to fresh 32-year lows against the dollar as last week came to close.

And I don’t think traders fear an intervention anyway. The threat may be enough to slow the pace of buying, but the longer the USD/JPY is capped by these threats, the greater the next breakout rally due to pent-up demand.

As US Treasury Secretary Janet Yellen made clear that Washington had no appetite for concerted action, she also noted that the dollar’s overall strength was a “natural result of different paces of monetary tightening in the United States and other countries.”

An intervention this week could cause short-term weakness in the USD/JPY, but the long-term trend will remain intact until the Fed turns dovish or the BOJ becomes hawkish. A major financial crisis would be another event that could drive down Treasury yields and drive investors into the safety of the Japanese Yen. Until then, the ‘trend is your friend’.