The Japanese Yen: No Relief in Sight: Top Trade Q1 2022

The JPY has been the worst performing G10 currency this year. Driving the JPY weaker has been a reasonably benign environment for risk assets, higher US rates and more recently the energy shock. Crude prices continue to remain “sticky” around $65-$70 a barrel. US rates look firmly set to go higher and equities may well stay supported, if not repeating the strong gains of this year. This should keep USD/JPY supported near 115.00, with scope for a break towards 120 as the Fed embarks on its tightening cycle – potentially next summer.

The Bank of Japancontinues to show no interest in raising rates. With 10-year JGBs hovering around 1/2 of 1 basis point, rate differentials will not be helping the Yen in 2022. USD/JPY is certainly a tale of two output gaps. The US economy is expected to run a 2% of GDP positive output gap next year. That means that the Fed may push to the front of the queue when it comes to tightening in the US. Despite recent growth, Japan’s economy is still expected to run a 1% negative output gap in 2022 – in other words pricing power is weak.

While the BoJ may not want to see USD/JPY trading sharply through 115 for the time being, the combination of a turn in energy lower next spring and the Fed preparing for lift-off suggests 2Q22 could be the topside break-out period for USD/JPY.

--- Written by Pete Mulmat, CEO IG US

Connect with Pete on Twitter @traderpetem