It is hard to find a Forex currency that has benefited more from the banking crisis than the yen. While its main competitors in the status of safe-haven assets—the U.S. dollar and the franc—stalled, afraid of falling Treasury yields and the contagion of U.S. bank failures in Europe, the yen was steadily strengthening. However, as the Fed meeting approaches, the ardor of the "bears" on USDJPY starts to fade.

Dynamics of the yen, U.S. dollar and franc

In a calm market, the dynamics of exchange rates are determined by the monetary policy of central banks, which affects bond yields and facilitates the flow of capital from one country to another. The fact that the Bank of Japan anchored its own debt market rates for a long time as part of the curve control policy made the USDJPY pair sensitive to U.S. Treasury yields. Its sharp collapse, comparable to the Black Monday in the stock market in 1987 due to the bankruptcy of the SVB, gave the yen cruising speed. The U.S. dollar collapsed to £130.5 and it seemed that this was not the limit.

The fact that speculators were actively selling the yen before the banking crisis played an important role in the fall of USDJPY. They did not see any changes in the monetary policy of the BoJ until June. They say that the new head of the Central Bank, Kazuo Ueda, will need time to look around. He is unlikely to rush into the fray at the first Board of Governor's meeting under his leadership, expanding the range of targetable yields. As a result, hedge fund net shorts on the yen reached their highest level since September. And then came the banking crisis. An avalanche-like unwinding of positions collapsed the USDJPY to a 1.5-month bottom.

Dynamics of USDJPY and hedge fund positions on the yen

What's next? Why did the pair start rising? The answer lies on the surface: as the banking system stabilizes, U.S. Treasury yields and the chances of a 25 bps federal funds rate hike at the March FOMC meeting begin to rise. They have risen from 60% to 83% in the last couple of days. Investors are beginning to doubt that fear of financial instability will force the Fed to end its monetary tightening cycle early.

Will investor interest return to the U.S. dollar? I suppose it will depend on the updated FOMC forecasts. In December, the Central Bank expected the federal funds rate to rise to 5.1% and did not expect it to decline in 2023. If the ceiling remains at the same level, and hints of a "dovish" reversal appear in the forecasts this year, the USDJPY pair will return to a downward trend.

Technically, on the daily chart of the USDJPY, the inability of the sellers to storm the 130.5 pivot point was the first sign of their weakness. However, as long as the pair trades below dynamic resistance in the form of moving averages, the mood remains "bearish." A rebound from 133.65 and 134.15 should be used to form shorts.