Can Japanese Yen regain it’s strength against the US Dollar?

The yen has historically been one of the most actively traded currencies in the world. It’s played the role of a foil for the US dollar, a safe haven in times of stress, and often as not it’s been the funding currency for carry trades, thanks to its low and sometimes negative interest rates.

Times change however and though the Yen remains a global reserve currency its place in the world has shifted. That’s because the BOJ allowed, or at least didn’t stop the currency, from weakening significantly over the last two years.

The Japanese yen has lost more than -26.00% of its value against the dollar in the last 24 months.

In truth, however, the Yen’s Real Effective Exchange Rate, or REER, has been falling for far longer.

• Related guide: Best brokers for trading USDJPY

Analysts at Societe Generale calculate that the yen has lost half of its value since the Global Financial Crisis, or GFC, of 2008.

Since then Japan’s GDP growth per capita has risen far more slowly than that in the US.

The battle against deflation in Japan appears to be won. Wages are rising, interest rates are no longer negative, and are expected to rise over time.

So what does all this mean for the Japanese currency and the dollar-yen rate?

USDJPY Predictions

Analysts expect the Yen to strengthen over the medium term against the USD, in the coming quarter the average forecast, among contributors, to FX Street’s weekly poll, comes in at 145.23 against the dollar compared to the current spot rate of 151.56.

However, if we put the fundamentals to one side for the moment, from a technical standpoint, it looks to me as though the yen could weaken further.

If, for example, it pushed cleanly through 152.00. A move that would open the door to 160.00.

Let’s not forget that the yen was trading at 277 to the greenback in the early 1980s, before rallying to trade at 87 in the mid-90s.

Japanese markets often act unpredictably and they rarely follow convention, so we shouldn’t take anything for granted.

Is USD JPY a good pair to trade?

Dollar yen is one best pairs to trade thanks to its deep liquidity, and its reserve currency status.

And, the tendency for the market to use the Yen as a source of funding.

By, for example, borrowing yen, at little or no cost, to buy currencies like the Mexican Peso, which has a notional yield of around 11.00% currently.

These flows mean that there is nearly always activity in dollar yen.

However, liquidity can occasionally be an issue, out of hours around long Japanese holidays.

The most recent Bank for International Settlements Triennial Survey found that the yen was the third most actively traded FX instrument, after the dollar, and the European single currency.

Accounting for more than +16.0 of daily global FX turnover, dollar yen made up the lion’s share of that trade.

USDJPY Trading strategy correlation

For the last two years it’s been right to be short the yen against most other currencies, and in particular the us dollar.

In that time Japanese interest rates were pegged below zero, whilst US dollar rates were rising. That may have changed now, with yen rates back at zero and US rates static for now, if not falling immediately. Near term the dollar seems to be strengthening once more, with the dollar index adding +0.93% on the week.

For now, then it looks as though the status quo will be maintained. Unless we break solidly below 150, from where we could move to the one-month high for the yen at 145.90.

However, to do that we would need a catalyst to put the yen back in demand. A further sharp rise in Japanese interest rates could make that happen, however, the Bank of Japan is conservative with a very small “c” so that seems unlikely to me.