The Japanese yen has the potential for further strengthening

01 December 2022 209
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The Japanese yen has historically been a safe-haven currency where investors would put their assets when there was uncertainty in the global economy. In 2022, this logic was broken, as investors paid attention to the difference in interest rates in the light of maximum inflation. The current dollar correction may return the "protective function" of the yen to its former place, so it's strengthening against the dollar may be stronger than other currencies.


Additional factors for the strengthening of the yen are interest rates. Bank of America (BofA) forecasts 10-year US Treasury yields to drop next year. This is explained by the fact that the Federal Reserve System (Fed) slows down monetary tightening and lowers interest rates. The Fed takes these steps to stimulate the US economy.


Spread of rates can also narrow the theoretical tightening of Japan's monetary policy, due to rising inflation in the country. According to The Bank of Japan’s research note, more and more Japanese firms are raising prices. This situation occurs even in areas that previously rarely passed the costs on to customers.


Also, the historical appreciation of the yen after the rally in the dollar cannot be ignored. But such a move of Japan’s currency can only be expected on a long-term investment horizon.

The Japanese yen has the potential for further strengthening - Photo 1

Yen’s rise after corrections


At the moment, the USD/JPY currency pair has come out of the consolidation and gone below the Fibonacci level, which was built from the very beginning of the growing trend in the dollar. 


The impulsive movement in the yen may continue to the level of the 200-day moving average of 135.0. There has already been trading at this level. Breaking through this level may open the way to the next Fibonacci level. However, the implementation of this goal may be delayed, so at the moment, the main target for USD/JPY decline is 135.0.


Stop can be placed at the level of return to consolidation (138.3).

USD/JPY is likely to continue to decline:

Take profit - 135.0

Stop - 138.3

This content is for informational purposes only and is not intended to be investing advice.

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