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.


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.