Despite the fact that the median forecast of Bloomberg experts suggests that the USD/JPY pair will fluctuate near the 105 mark until the end of 2020, the yen has plenty of trumps to strengthen its position. At the same time, the meeting of the Bank of Japan and the release of US GDP data for the third quarter make it one of the main contenders for the role of the most interesting currency in the last week of October.
After Warren Buffett started buying shares of Japanese retailers, foreign capital flowed into the stock market of the land of the rising sun. In the week to October 9, non-residents bought £1.42 trillion ($13.5 billion) of Japanese shares on a net basis, the highest in 18 months. According to Goldman Sachs, local stock indexes will outperform foreign counterparts for several reasons: due to the insufficient share of non-residents, high demand for mergers and acquisitions, and active purchases of Japanese securities to Whales.
Dynamics of purchases of Japanese shares by non-residents:
For a long time because of the low, often negative, interest rates on bonds of local investors were forced to seek their fortune outside Japan. The issue was particularly acute for pension funds and insurance organizations. The pandemic and its associated massive monetary stimulus have reduced global returns and reduced the need for capital to flow to Europe or the US. The fact that the money is being returned to the homeland can support the bears in USD / JPY. Moreover, the world's largest pension fund, GPIF, which manages $1.6 trillion, is close to reaching the limit on the purchase of foreign assets.
Simultaneously with the decline in the profitability of global debt market instruments, the cost of hedging currency risks is also falling. As a result, investors who invest in foreign assets have a great opportunity to sell dollars and other currencies against the yen.
Dynamics of costs of hedging foreign exchange risks:
Thus, the growing demand for Japanese stocks, the decrease in the attractiveness of foreign bonds for residents of Japan, and the fall in the cost of hedging currency risks are strong arguments in favor of continuing the downward trend in USD/JPY.
Let's not forget about the bearish prospects for the US dollar if Joe Biden wins the presidential election, driven by rising double deficits, declining political risk, and falling demand for safe-haven assets. However, the second consecutive reduction in consumer prices in Japan is likely to cause serious dissatisfaction with the BoJ. It is quite possible that the Central Bank has already intervened twice in the life of Forex when the analyzed pair approached the 104 mark in July and September.
Technically, as long as the USD/JPY quotes are below the dynamic resistance in the form of a combination of moving averages, the situation continues to be controlled by bears. At the same time, a break of the lower border of the triangle near 104.5 can become a signal for opening shorts. It is not a fact that the Bank of Japan will be able to stop sellers for the third time in a row.
USD / JPY daily chart:
