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Forecast for the Japanese yen for 22 September 2020

2020-09-22

2020-09-22

Yen: It smells like a trouble. Forecast for 22.09.2020Dmitri Demidenko

The Japanese yen is one of the best-performing currencies in September. I will cover the reasons for the yen rally. I also offer the EURJPY trading plan for the week at the end of the article.

Fundamental yen price forecast for the week

When I recommended buying[ the Japanese yen][1] a week ago, I considered four growth drivers. They are the stabilization of the political environment in Japan after the new Prime Minister took an office, the divergence in the monetary policies held by the BoJ and other world’s leading central banks, the talks about the escalation of trade wars, and, finally, the uncertainty associated with trade wars. Since then, the [EURJPY][2] rates have dropped by more than two figures. In addition to the previous yen’s benefits, there are new ones. So, the euro is likely to continue falling versus the yen.

The new head of government, Yoshihide Suga, does not see the need for any immediate changes in the monetary policy of the Bank of Japan, which kept financial markets stable and loans to companies affected by COVID-19. The prime minister’s speech gave rise to rumors that if he intervened in the central bak’s policy, it would be in order to support the labor market, contribute to the economic recovery or limit the yen strengthening, rather than to accelerate the growth of consumer prices. According to Oxford Economics, Suga doesn’t pay much attention to the inflation rate. While the GDP growth is going back to the trend and the markets remain stable, the BoJ doesn’t depend on the inflation.

If so, the CPI drop below zero shouldn’t scare investors with the potential boost of the stimulus. Besides, the divergence in the monetary policy will continue to support the [USDJPY][3] and the [EURJPY][2] bears. If we take into account the stability of the Japanese government bond yields and the sharp drop of their European and American peers, the yen looks undervalued compared to the euro and the US dollar.

Dynamics of Japan’s inflation

Source : Bloomberg

Dynamics of bond yields

Source : Bloomberg

The second pandemic wave in Europe, the correction of the US stock indexes, and the associated growth of the demand for safe-haven assets are other important factors pressing down the [EURJPY][2]. Theos pair is more responsive to the [S&P 500][4] drop than the [USDJPY][3]. It happens because investors are concerned that not only the euro-area but also the global economy will follow the W-shaped recovery. In this case, the US dollar will be quite demanded, as it was in early spring.

Dynamics of EURJPY and S&P 500

Source : Trading Economics

The US stock market has been boosting like a bubble amid the expectations for a quick rebound of the US economy. It is time for correction now. Investors believe that it will be more difficult to spur the full economic recovery than it used to be. Besides, the situation is worsened by the political uncertainty associated with the US presidential election and a worse epidemiological situation in the euro- area.

Weekly trading plan for [EURJPY][2]

So, the divergence in the monetary policy, the second pandemic wave in the euro-area, the concerns about W-shaped recovery of the European and global GDPs, and the associated increase in the safe-haven demand suggest holding the [EURJPY][2] shorts entered [at level 124.6][1] and adding to them on the price growth. The middle-term targets are 121.7 and 120.7.

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Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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Price chart of EURJPY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. www.liteforex.com/blog/analysts-opinions/four-reasons-for-buying-yen-forecast-as-of-160920/
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