Fundamental Forecast for Japanese Yen: Bearish

The Japanese yen weakened against most of its major counterparts this past week and will likely continue its southern journey as risk appetite regain its footing. Heading into next week’s trade, JPY traders will shift their focus to Japan’s final economic activity report for the fourth quarter in addition to the fundamental developments in Europe, U.S. and tensions in the Middle East/North Africa. At the same time, gauging sentiment will be as important as the developments themselves.

The Japanese yen lost ground against the greenback last week as economic conditions in the U.S. showed a brightened outlook for the region, while conditions in Japan failed to produce the necessary fundamental drivers to validate a clear turnaround in the Japanese yen. Indeed, one key reason behind the selloff in the Japanese yen was hawkish comments by European Central Bank president Jean Claude Trichet as the ECB head said that the risk for inflation have moved to the “upside.” At the same time, Mr. Trichet went onto add that developments continue to show “positive underlying” momentum in the real economy, while noting that the Governing Council may rise its key overnight lending rate as early as next month. The result fueled risk appetite and increased interest rate expectations for the euro area. With inflation concerns gathering pace not only in European but also in the U.K. and U.S., any hawkish comments by policy makers next week could lead the yen to extend its losses.

As the calendar in the U.S. is filled with risk sensitive events, currency traders should closely monitor the upcoming releases as well as investor sentiment in order to accurately gauge price action in the USDJPY. Developments in the U.S. are worth noting due to the fact that the yen tends to benefit from its safe haven status rather than the developments in the region. The yen is considered a safe haven because its current account surplus reduces Japan’s dependence on borrowing from abroad. It is important to note and attribute the yen’s rally last year to its safe have appeal because as the world’s largest economy stabilizes, the yen is expected to lose ground. The calendar in the world’s largest economy will highlight advance retail sales and the U. of Michigan confidence report. Following a labor force print of 192K in the U.S. for the month of February, better than expected releases next week may begin to add color to the economic recovery in the region and push the USDJPY higher. Other events that could dictate yen price action will be New Zealand’s and the Bank of England’s interest rate decision, in addition to Australia’s and Canada’s employment change.

Taking a look at price action, technical developments in the USDJPY are painting a bullish outlook for the pair despite Friday’s selloff. The pair rebounded off of its rising trend line dating back to October 29th, while the slow stochastic indicator has crossed over to the upside, hinting at further gains. At the same time, our speculative sentiment index is recovering from extreme levels, signaling that a possible turnaround may be in the horizon. All in all, remain long USDJPY so long as downside risks are capped by 81.6.

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