Neither the epidemiological situation nor the state of the Japanese economy is of particular concern to USDJPY traders. The fate of the pair lies in the hands of US Treasuries and the Japanese stock market. Let us discuss the Forex outlook and make up a trading plan
Monthly Japanese yen fundamental forecast
While the dollar does not know how to behave in response to positive US economic data release, the yen reacts quite predictably. The release of strong data on US PMI and employment could have two consequences. The first one is a growth of stock indices, which is harmful to the greenback as a safe-haven currency. The second one is a rally in Treasury yields, which is perceived as good news for the USD index. USDJPY price grows in both cases.
The Japanese buy American securities, and the Americans buy Japanese while the yen continues to weaken. According to the Ministry of Finance of Japan, from the beginning of February to March 20, Japanese investors' net income amounted to ¥2.815 trillion from foreign bonds. Morgan Stanley research shows that Treasuries were most actively sold at the Asian Forex session at the turn of winter and spring, while in March sellers were active at both at both Asian and European sessions. Thus, Japanese investors were at the origins of the rapid rally in US bond yields, which undermined USDJPY bears' position.
Treasury sellers activity
Source: Wall Street Journal.
At the same time, foreign investors' interest in Japanese stocks is growing. This interest was initiated by the well-known investor Warren Buffett, who acquired the shares of Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. His company Berkshire Hathaway issues yen-denominated debt to attract cheap resources. According to Morningstar, net capital inflows into ETFs targeting the Japanese stock market totaled $3.1 billion from August to January, compared with an outflow of $22.8 billion for the period from August 2015 to July 2020.
The situation at Nikkei 225 does look pretty good. In November, the index finally updated its all-time high of 26489 recorded in 1991 and continued the rally. The S&P 500 in the same period rose from 390 to more than 4000. The Japanese stock market grew by 27% from October 1 to April 1, the US one - only by 19%. It is becoming very profitable for foreigners to invest in Japanese issuers' securities, while hedging against currency risks raises the USDJP prices to the maximum since March 2020.
USDJPY and Nikkei 225 dynamics
Source: Trading Economics.
The fact that the Bank of Japan is not going to abandon the ultra-easy monetary policy and that the Japanese government is considering introducing another additional budget to combat the pandemic will positively impact Japanese stock indexes and the USDJPY bulls.
Monthly USDJPY trading plan
In my opinion, the pair's correction will be possible only if Joe Biden has problems with passing the legislation concerning raising corporate tax from 21% to 28% through Congress. The tax project begins to meet resistance among big businesses. The chances of its approval by legislators are decreasing because there is a lot of money behind every significant politician. This is modern reality. The controversy could stall a rally in US Treasury yields. However, in my opinion, any USDJPY obstacles on the way to 112 and 114 will be temporary. I recommend buying the pair.
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