Would the US dollars Rally, again?

Would the US dollars Rally, again? Inflation in Japan soared to the highest levels in more than 30 years, to 3.7% in October, up from 3% printed a month earlier.


Why the USD is Poised?
Traders Prepare for Potential Dollar Rally





Why the USD is Poised?


This is great news for traders and investors as it indicates that the Japanese economy is growing at a healthy pace.
The inflation rate is expected to remain high in the coming months,
which will provide ample opportunities for profit-taking.

High inflation prints sure revived the Bank of Japan (BoJ) hawks and the calls for a policy rate hike,
but it’s unsure whether the BoJ will give up on its ultra-soft policy stance.
Therefore, if the USD picks up momentum against JPY,
which will certainly be the case if US data continues to surprise to the upside as it has been recently,
then USDJPY could easily rebound back above its 50-DMA near 145.

The US dollar has been on a roller coaster ride in recent months,
but I believe it is poised for a recovery.

Here are three reasons why:

Most Fed members remain relatively hawkish regarding the Fed’s policy tightening.
This means that they are still supportive of higher interest rates,
which should help to support the value of the dollar.

The U.S. economy continues to outperform many other developed economies around the world.
This relative strength should eventually start to translate into
more demand for dollars as investors seek out safe havens during periods of global economic uncertainty.

Although geopolitical risks abound, the United States remains one of the most stable countries in the world.
This stability is often underestimated by investors,
but it ultimately supports higher asset values and helps to attract capital flows.
All things being equal, this should benefit the dollar.

Plus, options traders are building a topside structure over the one-month tenor that covers the next US inflation report
and the Fed’s next policy meeting in December.
The move suggests they see scope for a near-term rally in the dollar as these key events approach.





Traders Prepare for Potential Dollar Rally


On Wednesday, data showed that US consumer prices rose moderately in October,
underpinned by higher costs for healthcare and rental accommodation.
This was enough to keep alive expectations that inflation will pick up towards the end of this year
as energy prices rebound from their slump earlier in 2020.

Meanwhile, minutes from the Fed’s last policy meeting suggested that officials are comfortable
with leaving interest rates on hold at current levels
until they see “substantial further progress” on their goals of full employment and 2% inflation.
With both these key event risks looming large,
it’s no surprise to see options traders positioning for a potential dollar rally over the coming month.

In the UK, the autumn budget statement went happily eventless.
Gilts rallied, the pound saw limited sell-off,
while energy companies’ reaction to windfall taxes remained muted.
This was all good news for traders and investors alike as it showed
that the UK economy is still on track despite Brexit uncertainty.




Japan’s Economic Crisis


Japan’s Economic Crisis



Japan’s Economic Crisis, Japan is no stranger to market volatility as the world’s third-largest economy,

the country’s recent statement that it will enhance its foreign currency reserves shows that it is taking precautions to insulate itself from any future economic crisis.



Traders and investors rejoice
The Pair: Flipped
The Fed’s Gradual Ascent






Traders and investors rejoice


This action may signify improved stability in Japanese markets for traders and investors.

And, given the country’s large cash reserves, there may be chances for individuals wishing to invest in a range of assets. Whether you want to invest in stocks, bonds, or real estate, Japan might be a good place to put your money.

This is hardly surprising considering Japan’s recent announcement of an imminent economic stimulus plan.

The package is estimated to be valued at JPY25.1 trillion ($170 billion USD).

This is a large sum of money, and it is apparent that the Japanese government is serious about fueling its economy.

Some worry that the stimulus will be too big and will lead to inflationary pressures in the future.

Shunichi Suzuki, Japan’s Finance Minister, has addressed these worries, saying that “we will always take action against excessive actions.” It’s encouraging to see that the Japanese government is aware of potential concerns and is taking precautions to prevent them.





The Pair: Flipped


The USD/JPY pair is struggling to find impetus today, bouncing in a narrow zone during the first half of trade. #

The pair is now trading slightly over the 148.00 level, and comfortably inside yesterday’s trading range.

Because there does not appear to be a clear trigger driving price movement at the present,

we may see more of this choppy consolidation in the short term.

The US dollar has been hovering at a three-week low, which has proven to be a significant headwind for the USD/JPY pair.

Softer US macro data reported on Tuesday indicated hints of a slowdown in the world’s largest economy,

perhaps forcing the Federal Reserve to adopt a more hawkish position.

This resulted in another drop in US Treasury bond rates, which continues to weigh on the greenback.


The Fed’s Gradual Ascent


The Fed is still projected to raise interest rates by 75 basis points in November and to continue tightening policy,

albeit at a slower pace. The Bank of Japan, on the other hand, is sticking to its ultra-easy monetary policy.

As a result, the path of least resistance for the USD/JPY pair is to the upside.

However, bulls are hesitant ahead of the Bank of Japan meeting on Thursday,

which might give some guidance for future rate rises.

The USD/JPY pair is vulnerable to range-bound market behaviour as it approaches important central bank event risk.

Market participants are hesitant to make strong bets, which might lead to the present range being extended.

The US New Home Sales data will be issued later in the morning North American session and may offer some momentum to the market. However, bond rates and overall market risk sentiment will have an impact on the key currency pair.




Japanese investors dumping the Yen


Japanese investors dumping the Yen


Japanese investors dumping the Yen, Investors in Japan are increasingly turning to foreign currency deposits as a way to diversify their portfolios and take advantage of higher yields.


Benefits of Foreign Currency
Yen Weakness Impacting Japan
Against the Dollar
What the future holds for the yen?






Benefits of Foreign Currency


Bank of Japan data shows that foreign currency deposits at domestic banks surged 8.3% in the first eight months of this year, to 26.58 trillion yen ($182.38 billion).
This is the highest level since 2015, suggesting that investors are becoming more comfortable investing in overseas markets.

One key reason for this shift is that interest rates remain low in Japan, despite increases by other major central banks around the world.
This has made Japanese government bonds less attractive, especially compared to bonds from countries with higher yields.
For example, 10-year U.S Treasury yields are currently around 4 percentage points higher than equivalent Japanese government bond yields.

Investing in foreign currency deposits offers investors a chance to both diversify their portfolios and earn greater returns on their investment than they would by keeping their money in yen-denominated assets.

In addition, with the Bank of Japan unlikely to raise interest rates any time soon, the appeal of these investments is likely to continue.
The yen has weakened about 7% against the dollar this year and is trading near a two-year low.



Yen Weakness Impacting Japan


Some Japanese investors have been turning to foreign exchange margin trading to bet on further yen weakness.

The value of outstanding margin loans in yen terms hit a record high of $40.3 billion in August, up from $37.6 billion at the end of last year, according to data from the Tokyo Stock Exchange, “Foreign-currency deposits, a focus for relatively long-term investment,
increased along with yen depreciation this year and may have contributed to an extent to this year’s decline in the yen,”
said Lhamsuren Sharavdemberel, Barclays Bank analyst.

Foreign currency deposits have risen in popularity in recent months as the yen has fallen to 24-year lows.

Because retail investors may borrow up to 25 times their funds as leverage, margin trading volume increased to a record 1,229 trillion yen in June.

Given the current context of low-interest rates and prolonged yen weakening, analysts anticipate a significant rise in foreign currency deposits. At the end of June, households had a record 1,102 trillion yen in cash and savings, indicating that there is plenty of idle capital available for investment.

The increase in interest rates comes at a time when Japan’s central bank is attempting to arrest the yen’s slide with harsh interventionist measures.
Japan’s foreign reserves declined to $1.238 trillion at the end of September as a result of these measures, “Most of the increase, of course, is attributable to the change in valuations due to the weaker yen,” he said. But there was a big increase even after adjusting for nominal exchange rate changes in the yen”, said Lhamsuren.







Against the Dollar


The yen has been one of the biggest casualties of the dollar’s surge.
It is down 6% against the greenback this year and is now trading at its weakest level since early 2017.
While the yen originally rose following the intervention, it has now fallen back to roughly 145 against the dollar,
back to where it was before Japan’s major currency move.
The Japanese currency had recovered somewhat following intervention by the Bank of Japan in late September,
but it has since given up those gains and is back to where it was before the central bank’s move.

There are a few reasons for the yen’s weakness.
One is that Japan relies heavily on exports, so a strong dollar makes its products more expensive overseas and hurts demand.
The US dollar has been on a tear this year, thanks mostly to interest rate rises by the US Federal Reserve.
As a consequence of a dramatic market decline that has seen the S&P 500 drop 24% since the beginning of 2022, investors have sought refuge in secure assets such as dollars.

Additionally, with interest rates in Japan still near zero, there isn’t much incentive for investors to hold onto yen-denominated assets.
And finally, as China’s currency reserves have declined, there has been less demand for the yen as a funding currency.
The Chinese foreign currency declined from $3.055 trillion in August to $3.029 trillion in September.
Chinese officials blamed the drop on declining asset prices driven by the rising dollar.



What the future holds for the yen?


All things considered; it looks like the yen could continue to weaken against the dollar in the near term.
However, given that Japanese officials are likely to intervene if they feel that further depreciation would be harmful to their economy,
investors should keep an eye on developments in this situation.