USD / JPY 1Q forecast: Can the BoJ keep pace with the FOMC’s frenzied pace? – DailyFX

USD / JPY 1Q forecast: Can the BoJ keep pace with the FOMC’s frenzied pace?

One-year projections are difficult in all contexts, but the one we find ourselves in now seems particularly dangerous. At this point ahead of the New Year, there is a lot of optimism for 2021 and a lot of that is based on how difficult 2020 has been. While a global pandemic has stalled economies for much of the year, the prospect of a vaccine and a possible return to normal within the next year maintains hopes of a return to growth. This has helped to reach new all-time highs in a number of risky markets: it could even be said that at this point, the stock markets are “ priced to perfection ”, fully expecting the best scenarios in a a number of sensitive areas, such as the prognosis around a vaccine.

For next year, I want to look for continued weakness in the US dollar. I think the Fed is going to have to stay very active to continue guiding the US economy through the pandemic. The big question is which currency to mesh this projection with, as there aren’t really many central banks out there talking openly about the prospect of higher rates and, as of this writing, the EUR / USD and GBP / USD have been perching for almost several years, so that doesn’t seem like a suitable location either. But, a possible pocket of opportunity is in USD / JPY.

USD / JPY: Can the three pillars hold out without architect Abe

Given the uproar of 2020, it seems one of the most important political changes happened without much attention, and it was the transfer of the post of Japanese prime minister when Shinzo Abe resigned. Abe is the architect of the Abenomics, the economic strategy outside of Japan designed to reverse decades of lagging inflation; and key to this approach was the weakness of the yen, which manifested itself aggressively from 2012 to 2015 as the Bank of Japan coordinated with the Japanese government on a series of initiatives. However, around 50% of this new weakness in the yen was wiped out in 2016, as concerns began to build around Chinese markets, triggering a dose of risk aversion that created an easing in many carry trades. . But – with Shinzo Abe no longer ruling Japan, can those Abenomic-fueled yen losses stay?

The main area of ​​interest for the USD / JPY is the 100.00 level. This price came into play in the summer of 2016, helping to establish the lowest. A break down of this area on the chart opens the door to a potentially large drop, towards the 95.00 level on the chart.

USD / JPY Monthly Price Chart

Chart prepared by James Stanley, created with TradingView