Fundamental Forecast for the Japanese Yen:Bullish

-- Japanese Yen Declines Impulsively
-- Japanese Yen Outlook Bullish On Sentiment

The Japanese yen rallied against the U.S. dollar for the second consecutive week, and finish 1.48 percent higher against the greenback through Friday’s close on the back of a great deal of disappointing data from the U.S. With the USD/JPY continually making fresh yearly lows, Yen traders will now look to the BoJ and the FOMC rate decision for next moves.

The massive sell off in the USDJPY this week is largely attributed to the abundance of substandard data from the world’s largest economy. To begin the week, home sales in the U.S. fell 2.6 percent, leading the index to stand at its lowest level on record, while the monster employment index weakened in July, and signaled that private employment may continue to gather momentum at a slower pace than previously forecasted. Nonetheless, Nonfarm payrolls dropped a massive 131K in July after falling a revised 221K the previous month. The dismal of census workers contributed to a 202K drop in government payrolls. However, the breakdown of the report also showed that private payrolls are losing momentum as figures added a mere 72K versus economists’ forecasts for a 90K rise. Indeed, there is “unusual uncertainty” in economic activity in the U.S., as stated by Fed Chairman Ben Bernanke. Going forward, as the labor market continues to weigh on consumer and business confidence, the outlook in the U.S. economy will likely remain blurry, thus causing the green back to lose ground not only against the Japanese yen, but also currencies like the Euro, Aussie, and British Pound.

While the economic docket in the world’s third largest economy was fairly muted this past week, Yen traders will now look towards the Bank of Japan rate decision for further direction in the single currency. Interest rates in Japan have been unchanged at 0.10 percent since December 2008. Indeed, the central bank could expand its quantitative easing program; however, the BoJ will more than likely leave its policy intact. Ahead of the rate decision, traders are pricing in a zero percent chance that policy makers will hike rates twenty five basis points, according to the Credit Suisse overnight index swaps. Meanwhile, there have also been rumors circulating that the BoJ will intervene in the FX markets as the strengthening yen damages exports in the region. However, some market participants believe that there is a slight chance that the central bank will actually intercede. On Tuesday, Japan’s finance minister Yoshihiko said that foreign exchange rates in principle should be set by market forces. On the other hand Mr. Yoshihiko did note that disorderly currency movements could hurt economic activities.

With regards to price action, the USDJPY has extended yesterday’s decline and now looks poised to break below November’s low of 84.82 ahead of the BoJ, FOMC rate decision next week. Looking at the daily chart, the pair continues to maintain its tight descending channel, which has remained intact since June of this year. Potential gains in the pair may be capped by the 20-day SMA of approximately 87.215. Until a clear break above this level is apparent, a profitable long position seems unlikely. Also worth mentioning is our speculative sentiment index which now stands at an extreme of 7.32, and signals for further declines in the pair. With the outlook pointing to further losses, Yen traders should caution the pair entering in oversold levels, which is indicative of a correction. All in all, traders should await the FOMC decision and trailing comments for next moves.

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