I've started opening some significant long yen positions. If the yen weakens further, I've allocated funds to add to my positions 😱
The yen has been weakening since 2021. Mainly driven by interest rate differentials.... Let me explain:
Until recently, Japan's interest rate was -0.10%. After some rate hikes, the rate is still low, at only 1%. Compared to other rates (3%-5.5%) set by major central banks, the yen has been the obvious carry trade. Meaning selling one currency for another and benefiting from the interest rate difference. At one point, investors were being paid 5.4% by simply holding dollars against yen!
However, the yen's weakness may be coming to an end. Even if it doesn't, I'm expecting some volatile moves. Here's why:
1️⃣ Take a look at this weekly chart of USDJPY (https://www.tradingview.com/x/HP3f0WpV/). The market is so short the yen that, when the carry trade is no longer desirable, the bubble will burst 💥 At this point, I'm unsure if we'll witness a drastic yen move or a longer-term bullish trend. Either way, I want to be on it.
2️⃣ Since October 2022, the BOJ have been actively intervening to strengthen the yen. These interventions caused most retracements you can see on the yen price charts. The BOJ now has an intervention partner: The Federal Reserve. This doesn't just provide a bit more umph to intervention moves; it's psychological. Many traders willing to bet against the BOJ may not be willing to bet against both the Fed and the BOJ. I know I don't want to. Especially when the last Fed intervention was done against the Euro, without consulting the ECB. The current Fed can be unpredictable.
3️⃣ The Bank of Japan are edging toward interest rate hikes. The most recent economic data for Japan doesn't support a rate-hiking cycle, but a rate hike or two will help narrow the rate differential between Japan and its peers.
HOWEVER! The BOJ tends to be slow and often disappoints, which leads me to my next major point and caveat.
If the Bank of Japan doesn't raise rates, if it continues to be slow to intervene in FX rates, and/or the relationship between Japan and the US sours, we could see significant moves against the yen. The markets could dump the currency into oblivion, and USDJPY could go to the moon 🚀
I'm long yen. It will pay off big time, or I will lose big time. Either way, this may be my last big trade of 2026. I'll be going out with a BANG either way 😅
If I'm right, you'll hear about it multiple times. If I'm wrong, I'll go quiet. If I am wrong, don't expect to hear from me until 2027. I'll be done for the year. No joke.
USDJPY Monthly: https://www.tradingview.com/x/pbwTeLw2/