Why short JPY appears to be the FX trade to watch

There's a Bank of Japan rate decision on Friday, but it's not likely to yield a move up in rates despite a rise in inflation, according to economists who want to see a rise in wages first. The Federal Reserve Decision (Fed) is expected to pause tonight, but the European Central Bank (ECB) is forecast to raise rates on Thursday by 25 basis points, and another hike is forecast at the bank's July meeting. This means that the yen is likely to set a new 15-year low against the euro. Against the pound, the yen has been falling pretty much constantly this year, and Tuesday's strong UK job report gave more room to the BoE to keep its tightening cycle going. IGTV’s Jeremy Naylor looks at USD/JPY, EUR/JPY, and GBP/JPY.

(Video Transcript)

Nikkei

One of the big winners in terms of global equity markets has been the Nikkei, which rose to 25 rising to 33-year highs. Part of this has been the weakness of the Japanese yen. The Nikkei is full of exporters, and weakness in the local currency means that they find it easier to get the external markets going in terms of sales. And then, when they get the money back onto their balance sheets, it means more because of a weaker currency. Let's look first at the Nikkei to 25 before taking a look at the Japanese yen. This has been the move up that we've seen to these 33-year highs at 33,607. And it's continuing today as we go into the middle of the European trading day on the markets. These are 24-hour markets, and the Nikkei, as you can see, will continue to trade on the upside. But I think it's really all about this weakness in the Japanese yen.

USD

This is the USD traded against the yen in September and October. You remember that Japan's finance ministry intervened three times when the Japanese currency hit levels not seen since 1990. You can see the spike up that we've seen in this chart here. There's still a way to go from where we are back to those levels. But if the differential between the Bank of Japan's rates and those of other central banks continues to widen, it's likely the yen will weaken further. And some market watchers are already predicting more intervention. Now, if there's no move expected today from the Fed, certainly there is more expected to come to light in July and possibly August, as well as the Bank of Japan rate decision on Friday.

Japanese economy

But it's not likely to yield a move up in rates despite a rise in inflation across the Japanese economy. According to economists who want to see a rise in wages, there are other areas of the market as well, which I think are more interesting than the USD/JPY. This is the EUR trading against the Japanese yen. Recently, we've seen levels not seen in almost 15 years, and that continues to be the case. And we're very close now, with the euro trying to break through into new 15-year highs against the Japanese currency. While the Fed is not expected to pause today, the European Central Bank (ECB) is forecast to raise rates on Thursday by 25 basis points, and another hike is forecast at the bank's July meeting. Now this means the yen's likely to set new 15-year lows against the euro. I suspect I will break this line at 5162. Where it goes from there, well, there's only upside potential to go that way, possibly up to 169. But it doesn't stop there either, because we've got another central bank that's raising interest rates against the Bank of Japan, and that is the Bank of England.

The Bank of England

The Bank of England is widely expected to continue to raise interest rates. Now, some economists are forecasting 150 basis points, potentially over the next 18 months or so, from the Bank of England as it tries to combat inflation. And this means that there's an opportunity here, I think, to go short yen against sterling as well. Sterling is rising now. There you can see levels not seen: 170, 60, and 65. The last time we saw these levels was in January 2016. So, you can see lots of reasons I think to go short on the Japanese yen against other developed economy currencies.