Fundamental Forecast for Japanese Yen: Neutral

- BoJ unexpectedly cuts interest rates announces 5 trillion in asset purchases
- Trade balance surplus shrank to 103.2 billion yen
- Current account surplus narrowed to 1114.2 billion yen in August

The Japanese yen continued to strengthen against the U.S. dollar amid growing speculation that the Fed will add to their quantitative easing efforts. A dismal U.S. labor report where the world’s largest economy gave back another 95,000 jobs in September led by government layoffs. Yen strength continued despite the Bank of Japan taking their own stimulative measures, by reinstating their zero interest rate policy (first time since 2006) and creating a 5 trillion yen fund to purchase government and corporate debt. Outside of BoJ intervention the USD/JPY has been in a steep decline over the past five months. The Asian currency has managed to hold onto some of its gains against other currencies on the back of broader risk appetite.

The central bank’s failure to stem yen appreciation may leave them gun shy going forward. However, the government continues to put pressure on policy makers evidenced by recent comments from Japanese finance minister Yoshihiko Noda. The outspoken government official stated that deflation is one of the factors behind Yen strength and “under these circumstances, central banks have a very important role to play." He would go on to say "the rapid appreciation of the yen, which has reached its highest level in 15 years, quells expectations for economic recovery and casts a shadow over the sentiments of both firms and households."

The domestic economic calendar will have little impact on yen price action but an expected 3.8% decline in machine orders will underline the impact that Yen strength is having on the economy. However, the yen will take its cue from broader markets with the main event risk coming from the FOMC policy meeting minutes. Votes for added stimulus from the committee members could lead to markets pricing in a change in policy at the November 3rd meeting, leading to further greenback losses.

Although, the USD/JPY is at the lowest levels in 15 years and appears at or near oversold on any time frame greater than an hour, there still remains downside risks for the pair. The all-time low is at 79.70 and the Fed actually adding QE efforts could sink it to new depths. Traders may want to look at other yen crosses which have more definable levels to target. A EUR/JPY break below the lower bound of its recent rising channel could signal a short opportunity for the pair. Meanwhile, a hammer candle on the CAD/JPY may be a possible reversal point with 80.00 providing acting as a solid support level.

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