USD/JPY Forecast: Can Diverging Rate Paths Push the Yen Back to 100?

The Yen Carry Trade and the USD/JPY Return to 100

On Thursday, August 8, the USD/JPY extended its winning streak to three sessions, returning to 147. After the market disruption caused by the Yen carry trade unwind, Bank of Japan Deputy Governor Uchida Shinichi ensured the USD/JPY remained above 140.

However, the BoJ’s Summary of Opinions indicated that interest rates will continue to rise. This could lead to a narrowing of the interest rate differential between Japan and the US, potentially driving the USD/JPY below 140.

The Kobeissi Letter, a leading commentary on the global capital markets considered the size of the Yen carry trade, stating,

“According to Deutsche Bank, the Yen carry trade amounts to a whopping $20 trillion, or 505% of Japanese GDP based on Japan’s government balance sheet assets and liabilities mix. Other estimates that use Japanese banks’ foreign lending data from the Bank of International Settlements show that it is ~$1 trillion. […]. The Yen carry trade is massive.”

Despite the USD/JPY retreating to 141 in August, the significant rise from 102 in January 2021 to 161.951 in July 2024 suggests that the Yen carry trade remains influential.

The Bank of Japan has provided investors a window for an orderly unwinding of carry trade positions. However, three consecutive USD/JPY gains do not suggest that the markets embrace the Bank of Japan’s about-face on interest rates to restore market stability.

Interest rate differentials do matter and the Fed and the Bank of Japan are destined for diverging rate paths and possibly a USD/JPY return to 100. With the Bank of Japan unlikely to sit idly by, the markets may face more turmoil if the USD/JPY trends toward 160.

To provide further insight, experts have weighed in on the recent developments

Expert Commentary

ARK Invest Founder, CEO, and CIO Cathie Wood recently commented on Treasury yields and the Fed Funds Rate, stating,

“The metal-to-gold ratio suggests that the 10-year Treasury bond yield should be around 2% today, not where it is at 3.8% or last October’s 5%. If the 10-year Treasury should yield ~2% today, should the Fed funds rate be closer to 1%?”

The Bank of Japan’s Summary of Opinions revealed the intention to return the policy interest rate to the neutral rate over time, projected at 1%. If interest rate differentials do matter, the outlook is particularly bearish for the USD/JPY.

US Economic Calendar

On Friday, August 9, investors should track FOMC Member speakers. Insights on the US labor market, the economic outlook, and the interest rate trajectory may influence USD/JPY demand. Concerns about the US labor market and the economy, and calls for multiple rate cuts could push the USD/JPY below 145.

US initial jobless claims data from Thursday, August 8, eased immediate concerns about the US labor market. However, US continuing jobless claims continued to trend higher, affirming a softer labor market.

The unexpected rise in the US unemployment rate and continuing jobless claims trends supported multiple 2024 Fed rate cuts.

Rising expectations of a more dovish Fed rate path could signal a USD/JPY drop toward 140.

Expert Commentary

Arch Capital Global Chief Economist Parker Ross commented on the jobless claims report, stating,

“Recall that initial claims are flows into unemployment, while continuing claims are a reflection of how many people are unemployed. Flows (i.e. layoffs) have been relatively normal for most of 2024, but unemployed workers are taking longer to find a new job, which is reflected in the much higher level of continuing claims vs initial claims relative to recent non-COVID norms.”

Parker’s observations align with FOMC Member Thomas Barkin’s views on the US Labor Market. On Thursday, Barkin noted that firms were neither hiring nor firing, which could shift in either direction.

Short-term Forecast: Bearish

USD/JPY trends will hinge on central bank commentary. Support for multiple Fed rate cuts and pressure on the Bank of Japan to prepare for another rate hike could trigger another Yen carry trade unwind and a USD/JPY drop below 140.

Investors should remain alert. Monitor real-time data, central bank insights, and expert commentary to adjust your trading strategies accordingly. Stay updated with our latest news and analysis to manage USD/JPY volatility.

USD/JPY Price Action

Daily Chart

The USD/JPY remained below the 50-day and 200-day EMAs, affirming the bearish price signals.

A USD/JPY break above the 148.529 resistance level and the trend line would support a return to 150. Furthermore, a breakout from 150 could signal a move toward the 151.685 resistance level.

Central bank commentary needs consideration on Friday.

Conversely, a break below 147.500 could signal a fall toward the 145.891 support level. If the USD/JPY drops below the 145.891 support level, the bears could target the 143.495 support level.

The 14-day RSI at 32.39 suggests a USD/JPY drop below 147.500 before entering oversold territory.