The yen starts a new life

Fans of the Japanese yen throw the currency into the heat, then into the cold. After an impressive start due to a flash accident, the Japanese currency lost favor with investors amid improved global risk appetite. The US Fed confirmed readiness to make a long pause in the cycle of monetary tightening. Besides, the progress in the negotiations between the US and China have pushed US stock indices to their highest levels since mid-autumn. At the same time, investors revived interest in carry trade operations and sales of funding currencies. Obviously, the yen had a hard time under such conditions, but spring came and the situation on the foreign exchange market is gradually changing.

Dow Jones and USD/JPY Dynamics


Investors understand that shares cannot grow for an infinitely long time in the face of downbeat macroeconomic data across the United States, a slowdown in the US economy and a strong US dollar. Meanwhile, stock indexes are losing momentum making deeper correcional delcines. The high cost of currency risk hedging when investing in US assets makes Japanese companies think three times before investing money abroad. Finally, a divergence in monetary policy is certainly bearish for USD/JPY.

Japan's financial sector has realized the need for monetary policy normalization. Despite large-scale monetary stimulus, a 2% inflation target is still elusive, however, the side effects of the programs make it possible to criticize Haruhiko Kuroda and his team. First of all, this concerns losses on banking transactions. In addition, borrowers, believing that rates will remain at extremely low levels for a very long time, and are in no hurry to take loans for business development. Finally, the government, due to the low cost of borrowing, does not know of measures in attracting new financial resources and thus violates fiscal discipline.

Smoke without fire. No matter how much Haruhiko Kuroda mentions the readiness to expand the scope of QE, if necessary, investors understand that the potential of the program and the capabilities of the regulator are generally limited. Rumors of normalization can be a powerful driver to reinforce the yen. Moreover, the derivatives market increases the likelihood of a reduction in the federal funds rate in 2019. Currently, it exceeds 15%. Thus, if in 2015 the divergence played on the side of the bulls on USD/JPY, then in 2019 and later on, it may become invite the bears to the market.

At the same time, it is impossible to foresee that the pair will go down. To do this, first of all, you need a worsening global risk appetite, which can be based on disappointing macroeconomic data for the United States and (or) an escalation of the trade conflict. Perhaps change the arena of hostilities. For example, the US and the EU can participate in them.

Technically, the transformation of the Shark pattern in 5-0 continues. If the bears will be able to lower USD/JPY quotes below support by 110.8 (61.8%) and 109.65 (50%), the initiative will go into their hands. To continue the rally, bulls need to confidently attack resistance at 112.5 and 113.5.

The material has been provided by InstaForex Company -