While Washington is offering Tokyo a reprieve on tariffs, attributing the USDJPY pair’s downtrend to the strength of the Japanese economy and the BoJ’s overnight rate hike, the yen is strengthening on other factors. The Japanese currency is regarded as a highly reliable safe haven. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Investors favor the yen as a safe-haven currency.
- Speculators are actively buying the Japanese currency.
- The futures market is not sure about the BoJ rate hike.
- Short trades on the USDJPY pair can be opened with targets of 140 and 135.
Weekly Fundamental Forecast for Yen
US Treasury Secretary Scott Bessent asserts that the strong Japanese economy, rising inflation expectations, and a rate hike by the Bank of Japan are pivotal to the yen’s strength. However, the futures market, due to US trade policy uncertainty, has reduced the probability of at least one act of BoJ monetary restriction in 2025 from full confidence to 48%. However, these expectations have not hampered USDJPY bears.
Despite the deferral of the 24% tariff against Japan, the 10% universal duty and the 25% levy on car imports, which has been a source of concern for Tokyo, remains in place. This is likely to cool the economy of Japan and make the Bank of Japan more cautious. Notably, asset managers have increased net long positions on the yen to a record level, with hedge funds propelling them to their highest level since early 2021. The current economic climate presents a multifaceted challenge, and it remains to be seen how these factors will play out.
Speculative Positions on Japanese Yen
Source: Bloomberg.
The strengthening of the Japanese currency is rooted in concerns that the White House’s protectionist policies will impede global GDP growth and potentially trigger a recession in the US economy. In such an environment, assets considered safe-haven investments, such as the yen, Swiss franc, and gold, are experiencing heightened demand. The US dollar often performs well in such times, but not in the present case. The unpredictability of the Trump administration has led to a decline in the perception of the United States as a reliable investment destination. The current market is characterized by a significant sell-off in US stocks and bonds, which is leading to a decline in trust in the greenback.
This is evident in the growing demand for hedging USD index purchases; the greenback reversal risks against the yen continue to fall, signaling more interest in USDJPY put options than buy options. As a result, the currency pair is gradually declining.
USDJPY Performance and Risk Reversals
Source: Bloomberg.
The duration of this trend is yet to be seen. The USDJPY pair’s bearish trend has not been fully exhausted. If tariffs continue to threat the global economy, its slowdown will continue to fuel demand for safe-haven assets; on the contrary, a retreat of US tariffs due to proposals from other countries will allow the yen to strengthen thanks to the increasing chances of a resumption of the Bank of Japan’s monetary tightening cycle.
As a result, selling USDJPY could be a profitable strategy. If the euro faces challenges in the global economic downturn, the yen will likely perform well. The strengthening of the yen will result in lower import prices, which is beneficial for Japan’s economy, particularly given its dependence on commodity imports. In addition, exports require support, and the official Tokyo government is committed to providing it.
Weekly USDJPY Trading Plan
Against this backdrop, short trades on the USDJPY pair formed at 150.6 and 144.8 can be kept open for an extended period with targets at 140 and 135.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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