Fundamental Forecast for Japanese Yen: Neutral

- Japanese Yen Forecast to Gain Further
- Japanese Yen Rallies To 15-Year High

The Japanese yen extended its 5-week advance against the U.S. dollar, and has finished 0.39 percent higher against the single currency through Friday’s close. During this past week, the USDJPY tumbled to its lowest level in 15 years as the yen benefited from risk aversion. With the strength in the single currency now weighing on its export market, market participants are anticipating of an intervention by the Bank of Japan.

The yen continued to strengthen against the greenback this past week as investors continued to seek safety amid the recent disappointing data from the world’s largest economy and its dour outlook. To begin the week, the Fed national activity index came in flat, suggesting that economic activity and inflationary pressures may remain subdued. Meanwhile, existing and new home sales plunged in July as Americans face subdued wage growth, tight credit conditions, and a weak labor force. Further fueling the yen’s safe heaven appeal are economists forecasting nonfarm payrolls in the U.S. to drop another 100K, while the unemployment rate is expected to climb to 9.6 percent in August from 9.5 percent the month prior. At the same time, Fed Chairman Ben Bernanke said that the FOMC is prepared to provide more accommodation if needed, and went onto add that he expects slow growth in consumer spending. These comments now leave the door open for further quantitative easing measures, following the Fed recent decision to reinvest MBS proceeds into treasuries.

While the yen has benefited from risk aversion this past week, rumors of a Bank of Japan intervention should not be overlooked, despite the chances of this occurrence being very minimal. Despite this slight chance, some members in the DPJ are arguing for a change in the Bank of Japan’s law, to force the central bank into action. On the other hand, there is a chance that policy makers may choose to step up its quantitative easing program as they did towards the end of 2009, in which a strong yen was threatening the recovery in the world’s third largest economy. In any case, as invention by the central bank is unlikely to occur this week, we may see a lackluster performance in the pair as JPY traders will shift their focus to the BoJ rate decision on September 6th. Until then, broader trends will likely dictate price action. That said, if we continue to see disappointing figures from the world’s largest economy throughout the week on top of a much greater than expected drop in nonfarm payrolls, the USDJPY will likely benefit from a flight to safety with the result likely to be a retest of the 15 year low.

Taking a look at price action, the pair remains bounded by the descending channel which has remained intact since June. As of late, the pair is testing the upper bounds of the range, which coincides with the 20-day SMA. Failure to break above this moving average will lead to downside risks back towards the 15 year low. However, a clear break above this trend line may pave the way for a profitable long position.

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