Sometimes, to turn everything upside down, it is not necessary to wait for signals from America. The release of stronger data on Japanese inflation allowed the bears on USD/JPY to take the initiative. The pair is ready to drop below the psychologically significant level of 150 amid hedge funds unwinding their maximum net shorts against the yen since mid-2022.
Dynamics of speculative positions on the yen
Despite consumer prices slowing down to 2.2% in January, the lowest since March of last year, and core inflation to 2%, the actual data turned out to be better than forecasts. This allowed the application of the principle of "buy USD/JPY on rumors, sell on facts." Even though Moody's Analytics believes that the Bank of Japan will find it challenging to raise the overnight rate above zero, and the futures market is geared towards a slow normalization of monetary policy, it is still set to begin in April. This circumstance instills hope in yen enthusiasts.
By the end of the first two months of 2024, it weakened against the U.S. dollar by 6.5% due to the reevaluation of market views on the fate of the federal funds rate, expectations of a slow BoJ monetary restriction, and a rise in global risk appetite. Indeed, the popular financial stress indicator from Bank of America has fallen to its lowest level in the last four years. In such conditions, the popularity of carry trade operations is growing, and the yen loses as the main funding currency.
Dynamics of the financial stress indicator and the yen exchange rate
Another bullish factor for USD/JPY is the increased demand for currency risk hedging by non-residents of Japan. They are inspired by the record highs in Japanese stock indices held for 34 years. By buying stocks, foreign investors simultaneously sell the yen to hedge emerging risks.
However, in my opinion, the divergence in the monetary policies of the Federal Reserve and the Bank of Japan is a more crucial factor, and the financial stress indicator is unlikely to remain so low for an extended period. Only presidential elections can change things significantly! If Donald Trump comes to power, U.S. foreign policy will become highly unpredictable. Uncertainty will increase the volatility of dollar pairs on Forex and reduce the attractiveness of carry trade operations. The yen may be able to heal some wounds.
In March, the upward trend on USD/JPY risks changing as, despite the downward trend in inflation in Japan, the BoJ will still raise the overnight rate. This is indicated by the recent comments of Bank of Japan Governor Kazuo Ueda regarding progress in shifting from deflationary thinking to inflationary.
The technical inability of the USD/JPY bulls to keep quotes above the fair value at 150.6 is a sign of their weakness. Thanks to the formation of the Double Top reversal pattern, the bears can expect a deep correction. Therefore, successfully breaching support at 150.15 makes sense for selling.