Fundamental Forecast for the Japanese Yen: Bearish

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The Japanese yen has pushed lower against the U.S. dollar last week, finishing as the worst performing G10 currencies through Friday’s close as risk appetite was fueled by the successful auction by Germany, Spain, and Portugal. Positive retail sales and investor sentiment from the 16 member euro area also gives reason for increases in riskier assets last week, and the flight away from low yielding currencies like the Japanese Yen. For this upcoming weak, we may continue to see the Japanese yen weaken as market participants await the Bank of Japan interest rate decision. Indeed, traders are expecting the key overnight lending rate to remain unchanged at 0.10 percent as the central bank evaluates its latest policy programs, while recent fundamental data suggests that recovery in the world’s third largest economy has stalled.

Taking a look at the Japanese economic docket last week, the most notable event was machine orders. Figures plummeted 9.1 percent amid economists’ forecasts for a 3.0 percent decline, with core machinery marking its largest fall since August 2008. The pull back is of particular note because the decrease is due to unrelenting weakness in business investment, and may therefore add additional weight onto the labor market which is presently struggling. Furthermore, the leading index slid back to 98.7 in May from 101.7 the month prior. Thus, additional disappoints maybe in the horizon due to the fact that movements in the leading index precede larger developments. Nonetheless, bankruptcies tumbled 19.3 percent in June, a signal that business confidence is indeed deteriorating.

As for this upcoming week, Japan is expected to show a drop in consumer confidence on Tuesday as the unemployment rate as of late advanced to a fresh yearly high. A reading far below economists’ expectations will likely set the stage for JPY price action leading up to Bank of Japan’s monetary policy meeting on Thursday. Indeed, market participants are weighing in a zero percent chance that the central bank will raise borrowing costs twenty five basis points at its policy meeting, according to the Credit Suisse overnight index swaps. Last month, the central bank announced that it will provide banks with 3 trillion yuan worth of low interest rates. Thus, the BoJ will likely keep rates at its record low as policy makers evaluate the impacts of its decision.

With regards to price action, Japanese yen weakness may carry over into next week’s trade as markets increase their appetite for risk. Looking at the USD/JPY from a technical perspective, price action has broken above the 10-day SMA, which is resistance turned support, while the pair rebounded from oversold territory. Despite our speculative sentiment index standing at 3.03, and signaling for further losses, it is noteworthy that this reading is off of its high of 5.0 from earlier this week. All in all, disappoints in Japanese fundamental data paired with a bullish USDJPY technical outlook may lead the exchange rate higher this week.

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