Will geopolitics support the yen? Forecast as of 16.10.2023


Unlike gold, the yen buyers do not take advantage of rising geopolitical tensions in the Middle East. Do USDJPY bears just need time?  Let us discuss the Forex outlook and make up a trading plan.

Weekly Japanese yen fundamental forecast

Cautiness caused the USDJPY to enter consolidation. Investors are willing to add up to the longs amid the divergence in the monetary policies of the Fed and the Bank of Japan. At the same time, they hesitate due to the sharply increased risks of currency intervention as the price approaches the level of 150. They still cannot answer the question of whether an FX intervention was carried out in early October. Furthermore, the armed conflict in the Middle East only increases uncertainty.

The statement by Japanese Finance Minister Shunichi Suzuki that when organizing a currency intervention, the government will be guided not by the level of the yen exchange rate but by its volatility proves that there was no intervention. The USDJPY volatility is approaching its lowest level since March 2022.

Dynamics of the USDJPY and yen volatility

Source: Bloomberg.

Goldman Sachs, Bank of America, and Mizuho are guided by this circumstance, predicting the strengthening of the dollar to ¥155 in 2024. This contradicts the consensus forecast of Bloomberg experts at 140. According to Mizuho, the Bank of Japan is well aware of the foreign environment. There are such facts as a strong US economy and uncertainty regarding the Fed’s monetary tightening. Under such conditions, foreign exchange interventions are ineffective. USDJPY will only go down when the greenback weakens due to the Fed’s dovish shift and a drop in US Treasury yields.

Remarkably, Japanese insurance companies, which manage about $2.4 trillion, made a contribution to the yen weakening. They either hold Treasuries in their portfolios and actively hedge using them, looking at the rise in the USDJPY. Or they sell these securities, which leads to a rally in bond yields. After accounting for hedging costs, the investment performance of US Treasuries is lower than that of their Japanese peers.

Dynamics of return on US bond yields

Source: Bloomberg.

Oddly enough, the Bank of Japan benefits from the conflict in the Middle East. Terrorist attacks against Israel fueled geopolitical tensions and dropped US bond yields. If it were not for the armed conflict in the Middle East, the rally in Treasury yields would have continued, and USDJPY would have reached the previously suggested buy target at 152. markets are unpredictable, and, at any moment, news can appear that will turn everything upside down.

Geopolitics may return the yen’s status as a safe-haven currency. Looking at how non-interest-bearing gold has soared, it is a natural question of why the USDJPY hasn’t dropped. I believe the reasons must be sought in the oil market, supporting the US dollar.

Weekly USDJPY trading plan

Thus, rising geopolitical tensions add uncertainty to the future yen trend. I still stick to the idea that the USDJPY will go up to 152. However, there is a high probability of a correction down and consolidation. It is still relevant to buy on the corrections.

Price chart of USDJPY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. 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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