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Forecast for the Yen: Bullish
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US Dollar May Fall as Yen gains on Fizzling Trump Trade Optimism
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USD/JPY Technical Analysis: Relative Strength Keeps USD/JPY Lower
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One of the biggest beneficiaries of the ‘Trump Bump’ across global markets was Japan. After the BoJ spent more than three years weakening the Yen as part of ‘Abe-nomics,’ disaster began to show as the Yen started to re-strengthen around the same time that the Chinese economy began to wobble in the summer of 2015. Matters began to really disintegrate for the Bank of Japan with the turn of the New Year into 2016: Risk aversion enveloped capital markets and investors rushed into the Yen in preparation for bumpier days ahead. This brought along the threat of undoing 3+ years, and more than $4 Trillion spent through the various conduits of Japanese QE. The BoJ just knew that something had to be done: Looking across the East China Sea showed a growing economy that was appearing to stumble with a very real and legitimate chance of a ‘blow up’, which likely would’ve led to Yuan weakness as Chinese investors looked for safer harbors. One of the safest harbors in the world during times of Financial Tumult? The Japanese Yen.
So at the BoJ’s rate decision in January of 2016, they shocked the world by enacting negative rates. This caught capital markets completely by surprise, and perhaps even denoted a tone of distress, as the BoJ was taking a radical, highly-untested action without any form of warning or public debate. And this worked. For about a day. The BoJ made this move on a Friday morning in Japan (Thursday night in the States, Early Friday Morning in Europe), and the Yen weakened as we rolled into the weekend. But the following Monday was brutal, as Yen strength came-back with a vengeance, and lasted for about six months as USD/JPY shed over 20%. The net result of the BoJ’s move to negative rates was that the bank scared investors so much that any tangible benefit of their move was wiped out in about 36 trading hours.
The Yen was pervasively strong until the election of Donald Trump. The ‘Trump Bump’ that enveloped global markets in the seven weeks after the Presidential Election drove the Yen lower as USD/JPY ran-up by as much as 17.2% from the election-night lows. But it’s not only the Yen that’s enjoyed the ride – the Nikkei moved up by as much as 22.3% from those same election-night lows. That’s more than 1/5th of value – added to a very major equity index – in three months. As we wrote last month ahead of the BoJ’s most recent rate decision, the bank was likely going to want to wait for more-confirmed signs of recovery before making any additional moves.