Fundamental Forecast for Japanese Yen: Bearish

The Japanese yen continued to benefit from its safe haven status this week amid uncertainty in the global economy, but the advance in the currency may begin to lose momentum as governments and central banks aim to take the necessary steps to stabilize their economies. JPY traders will now shift their focus to the Bank of Japan interest rate decision. With interest rates already in the range of 0 to 0.1 percent, the central bank is running out of options. Looking ahead, the BoE and FOMC rate decision in conjunction with the nonfarm payrolls releases next week may be the catalyst needed for the Japanese yen as the strengthening currency continues to weigh on the country’s exports.

The yen is considered a safe haven because the current account surplus reduces Japan’s dependence on borrowing from abroad. It is important attribute and note the yen’s rally to its safe haven appeal because once major economies begin to stabilize; the yen will rapidly depreciate. From a fundamental basis, consumer spending is likely to remain at depressed levels on the back of a weak labor market and deflation. At the same time, businesses will remain reluctant to add onto their payrolls so long as uncertainty remains, and in turn, households will continue to save rather than spend. Consumer confidence in the region is now at their lowest level since March of this year, and will keep downward pressure on consumer prices.

For this upcoming week, the economic docket in the world’s third largest economy is relatively light; however, JPY traders will place the spotlight on the Bank of Japan interest rate decision. At last month’s meeting, the central bank introduced a 5 trillion yen asset purchase program in order to “encourage the decline in longer-term interest rates and various risk premiums to further enhance monetary easing.” This emergency stimulus is an addition to the 918 billion yen package in September. At this upcoming meeting, 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. This assumption is accurate as the policy board recently pledged to maintain a virtually zero interest rate policy until annualized inflation climbs back into the range of 0 to 2 percent. Not to overlook, labor cash earnings and vehicle sales are on tap, but the FOMC and BOE rate decision may dictate yen price action this week and into the subsequent week due to the fact that the yen is rally on the back of weakness in some of the major economies.

Taking a look at price action, specifically the USDJPY, the pair is looking to test the key 80.00 level, with a break below exposing the record low of 79.70. Upside risks remain capped by the 20-day SMA, and until we see a clear break and close above this level on the back of positive U.S. fundamentals, I do not rule out further downside.

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