Fundamental Forecast for Japanese Yen: Neutral

- Japanese Yen Channel is Key
- Yen Intervention Unlikely as Capex Soars

The Japanese yen continued its northern journey against the U.S. dollar this past week despite Japan’s government issuing its latest fiscal stimulus package in conjunction with the central bank’s effort of monetary easing in attempt to weaken the yen as the strength in the single currency weighs on the nations export market. Yen traders will now focus to the Bank of Japan interest rate decision, and closely monitor subsequent comments by policy makers as calls for currency intervention intensifies.

This past week, the Bank of Japan kept their key overnight lending rate unchanged at 0.10 percent but allowed banks additional time to borrow funds. The central bank increased its funds supplying operation from 3 months to 6 months, which will raise the supply of loanable funds in the banking system. All in all, this new 10 trillion yen lending facility for 6 months is an addition to the 20 trillion yen which was initiated last year for 3 months. After the initial rally, the pair quickly reversed course as traders were unconvinced that the actions taken by policy makers would slow the yen’s momentum. The BoJ is in a tough position in that traders continue to seek safety amid uncertainty in the global markets, which is the leading cause of recent price action. In fact, some members want to let markets dictate price action. However, if policy makers remain on the sidelines at this week’s interest rate decision, with no mention of invention, there is a possibility that we could still see the yen weaken in the near term, not due to the central bank intervening, but on the back of a change in consumer sentiment. This scenario is very possible in that the yen has been following broader trends as of late.

Markets are now pointing to a shift in sentiment. The Dow Jones Industrial Average has broken above its tight descending channel, and has bounced the tight rising trend line dating back to April and has rallied about 100 points on Friday. How long will the stock market rally last? That is uncertain. However, what is becoming known is that the yen’s strength is due for a mild correction, and appetite may serve as that catalyst. At the same time, “optimism” that the global economy is on the road to recovery is increasing as many traders rule out a double dip recession, including the United States and the Euro-Zone. Indeed the broader effects are being overlooked, and we saw this with Friday’s U.S. nonfarm payrolls report. Regardless of payrolls pushing lower, the U.S. dollar surged against the Japanese yen immediately following the release because unemployed persons did not fall as much as economists forecasted. However, employment in the world’s largest economy remains depressed. Therefore, if reports this week from the U.S. economy actually show that figures are recovering from there depressed levels (rather than displaying better than expected declines) paired with a dovish BoJ, and a rise in risk appetite, the USDJPY could potentially push higher, and pave the way for the correction that many traders have been focusing on.

Taking a look at the currency markets, much has not changed with the USDJPY from the previous week other than that the pair tested the record low. Downside risks remain as the pair struggles to close above the 20-day moving average, which coincides with the upper bounds of the descending channel. Picking out a bottom with this pair before confirmation may come back to haunt a trader, but with risk comes reward.

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