US Dollar / Japanese Yen Monthly Technical Forecast
Remains locked in a very well defined downtrend from 2007 with the
market putting in a series of lower highs and lower lows. A fresh lower
top is now sought out by the 2009 yearly high at 101.45, to be
confirmed on a break below the matched 2008/2009 trend lows at 87.15.
As such, we look for a direct retest and break below 87.15 over the
coming weeks. However, monthly studies are starting to look very
stretched and we would not rule out the potential for a major shift in
the structure over the coming months. Our recommendation would be to
look for opportunities to buy into the next downside extension below
87.15, potentially in the 80.00-85.00 area.
US Dollar / Japanese Yen Interest Rate Forecast
Interest rate expectations continue to have little relevance to
USD/JPY price direction as the pair continues to trade lower despite
the bullish signal from a 67 bps spread. Japan has historically kept
rates at extreme low levels as they look to depress their currency in
order to spur foreign demand for domestic exports. However, the new
ruling Democratic party along with Finance Minister Fujii started their
tenures by leaving the door open for a change in philosophy.
Recent yen strength has seen their stance change with warnings from
minster Fujii of possible physical intervention if there are “biased
movements” in the currency. A protracted U.S. economic recovery may
continue to tilt the balance in the Yen’s favor. However, we have
started to see the pair lose its positive correlation to risk appetite
and declining optimism could unwind the carry trade and lend greenback
support as it has become the preferred funding currency.
US Dollar / Japanese Yen Valuation Forecast
The Japanese Yen has pushed further into undervalued territory
against the greenback as stocks began to wobble after seven months of
breakneck bullish momentum. Economic data has turned more mixed,
spooking investors with the thought that risky assets have done too
much, too soon and weighing on carry trades. If a meaningful correction
does transpire (as would be reasonable with shares trading at the
highest levels relative to earnings since 2003), Yen strength is likely
to continue as yield-seeking traders are liquidated, pushing USDJPY
deeper into undervalued territory. Momentum favors the Japanese unit
after three months of steady gains, though the yield outlook remains
firmly in favor of the Dollar. How all of this will play out given the
backdrop of near-weekly flip-flopping on FX intervention policy from
Japan’s new Finance Minister remains uncertain and we see it prudent to
remain on the sidelines for the time being.
Written by Joel Kruger, Technical Currency Strategist; John
Rivera, Currency Analyst; Ilya Spivak, Currency Analyst for DailyFX.com
What is Purchasing Power Parity?
One of the oldest and most basic fundamental approaches to determining
the “fair” exchange rate of one currency to another relies on the
concept of Purchasing Power Parity. This approach says that an
identical product should cost the same from one country to another,
with the only difference in the price tag accounted for by the exchange
rate. For example, if a pencil costs €1 in Europe and $1.20 in the US,
the “fair” EURUSD exchange rate should be 1.20. For our purposes, we
will use the PPP values provided annually by Bloomberg. We compare
these values to current market rates to determine how much each
currency is under- or over-valued against the US Dollar.