Bullish Yen Forecast: BOJ Vs Fed – December in Focus

The main factors behind the yen’s strength at this stage are more related to the BOJ, the euro and the Swiss franc than the dollar. This is a rare combination that suggests the Japanese currency still has some way to go before it finds a new equilibrium level. This week started with a clear positive movement for the yen, supported by higher than average EUR/JPY options volumes. However, currency traders will be more impressed by the decline in CHF/JPY, which, until the middle of this year, was a long-term strategy for investors who dared to sell the Swiss franc.

Currency traders take the view that the converging and interest rates will support the yen for a longer period of time, as Mary Nicola recently noted. However, the positioning measures suggest that there is plenty of room for bullish yen traders to get in before it risks becoming a one-sided market.

Meanwhile, Fed spokesmen have made it clear that they expect the US Federal Reserve to continue cutting interest rates next year. This comes in the context of BOJ Governor Ueda throwing down the gauntlet for a December rate hike, which forex traders have yet to fully price in, in a busy 24-hour period that could see a Fed rate cut followed by a BOJ rate hike. The game is on for bullish yen traders.

Japan’s currency will rise into late 2024 and beyond as the BOJ heads for a continued tightening cycle and tariff threats from President-elect Donald Trump fuel a recovery in the yen’s appeal as a reserve currency.

Policymakers in Japan are putting themselves in a corner where they will either have to raise rates this month or set a path for multiple hikes in 2025. Fed spokesmen are moving in the opposite direction despite signs of economic resilience in the US. That means expectations are running counter to Masaki Kondo’s analysis. In fact, they point to the surprising return to large yen shorts as a potential catalyst for another round of strong gains for the Japanese currency.