Fundamental Forecast for Japanese Yen: Bearish

The Japanese yen continued to depreciate in April, with the USD/JPY advancing to a fresh yearly high of 85.51, and the low-yielding currency may face additional headwinds in the coming days as central bank curbs its outlook for future growth. Given the limited reaction to the 7.4 magnitude earthquake that hit Japan earlier this week, it seems as though market participants are scaling back speculation for a huge wave of repatriation as the Bank of Japan increases its efforts to support the economy, and currency traders may continue to push the yen lower over the near-term as they increase their appetite for risk.

After holding the benchmark interest rate at 0.10%, the Bank of Japan said the real economy “is under strong downward pressures” following the slew of natural disasters in the Asia/Pacific, and offered JPY 1 trillion in one-year loans bearing a 0.1 percent interest rate in an effort to aid with the aftermath of the devastating earthquake and tsunami that hit the region last month. Moreover, the central bank pledged to take additional steps to shore up the economy if conditions warrant a further expansion in monetary policy, but expects the region to return to moderate growth once the rebuilding efforts get underway.

As the bearish sentiment underlying the Japanese Yen gathers pace, the rise in carry trade interest is likely to exacerbate the weakness in the low-yielding currency, and the USD/JPY may continue to retrace the sharp decline from the previous year as it breaks out of the long-term downward trend dating all the way back to 2007. However, as the relative strength index falls back from overbought territory, there could be a corrective retracement in the following week, and the dollar-yen may fall back to the 50.0% Fibonacci retracement from the 2010 high to the 2011 low around 85.50-70 to test for near-term support.

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