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Forecast for yen price for 14 October 2020

2020-10-14

2020-10-14

Yen has got a whale in the pond. Analysis as of 14/10/2020Dmitri Demidenko

Bank of Japan’s monetary expansion potential is limited: it already owns a major part of ETFs and the debt market, and that makes it the whale in the pond.  Let’s talk about how that can affect the yen, and make a trading plan for [EURJPY][1]

Monthly fundamental forecast for yen

The US election race made the traders completely forget about the Japanese yen, though it was the most interesting currency in September, able to grow on political uncertainty. However, investors preferred the US dollar as the main safe haven asset, while the [S&P 500][2]’s rally amid Joe Biden’s growing popularity forced [USDJPY][3] and [EURJPY][1] bears to defend themselves. The yen revived only on the rumour that the blue wave wouldn’t fall on the White House and the Congress.

Why are the US stock indexes growing in October? That discussion could be long. The economy remains resistant to the tense epidemiological state and continues growing steadily.  The Wall Street’s forecasts of Q3 downbeat corporate reports are getting better. The Fed pumped liquidity into the markets, and will hold rates low for a long time. Finally, Joe Biden’s victory will give the green light to a new relief package. It’s the last factor that the investors count on, pushing the S&P 500 upwards. However, the index may fall into consolidation as the situation is in fact ambiguous.

If the Republicans continue to control the Senate, they will  puts a spoke in Biden’s wheel and thus keep the political uncertainty. That will give a hand to both the dollar and the yen. [USDJPY][3]’s connection to the US stock indexes isn’t occasional. Japan’s residents are paying more attention to foreign markets amid Japanese obligations’ low investment appeal. At the same time, the S&P 500’s correction is a good opportunity to buy not only JPY vs USD, but also JPY vs Euro.

What worked out with [EURUSD][4] in summer may be as efficient with [EURJPY][1] in the next two or three months. I mean the divergence between monetary policy and economic growth. The ECB is freely using verbal interventions and hinting at QE expansion, but the Bank of Japan can’t do that. It has been buying out assets so aggressively, that its balance is now 137% of GDP.

Central banks’ balance dynamics

Source: Bloomberg.

The BoJ’s current share in the debt and ETF markets is 44% and 71%, respectively. The regulator is fairly compared with a whale in the pond. The more it increases its balance, the more cataclysms the investors will have to deal with after the monetary policy gets back to normal.

BoJ’s share in asset market

Source: Bloomberg.

Monthly trading plan for [EURJPY][1]

The IMF may forecast that Japanese and European GDPs will grow 2.3% and 5.2% respectively, but the eurozone’s economic growth will most likely speed up only in Q2. Until then, the second COVID-19 wave in Europe and Japan’s better epidemiological state allow us to exploit the economic growth divergence and sell [EURJPY][1] at 122.9 and 121.8.

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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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