Fundamental Forecast for Japanese Yen: Neutral

The USD/JPY has fallen nearly 6% since the April highs as the yen continued its advance this week. As traders piled into the Japanese currency, concerns of a possible intervention have investors once again eyeing the BoJ. This week, the yen advanced to levels not seen since March 18th when the USD/JPY hit record lows below the 77-handle. Strength in the currency has been supported by weakness in the dollar, which has been on the defensive since the Fed’s re-commitment to keep interest rates ultra-low for an ‘extended period’ last week.

Overnight the Bank of Japan warned that officials are watching the FX markets closely but refrained from using stronger language, suggesting that the currency’s rise to a 7-week high has not alarmed the central bank just yet. Still, traders unloaded long yen positions after the USD/JPY pair encountered support at the 61.8% Fibonacci retracement taken from the advance off the March lows at 79.80.

Today, a report in one of Germany’s largest news magazines, Der Spiegel, sparked rumors that Greece may be seeking to exit the euro. Although Greek officials denied the rumors, the euro sold off sharply, with equities surrendering much of the gains seen after NFP s surprised to the upside. In the coming days the yen may see some weakness as attention is diverted away from the dollar and back onto the ongoing sovereign debt crisis in Europe. The dollar advanced nearly 1% on Friday as traders continued to jettison the euro which saw its largest 2 day decline since December 2008.

We remain neutral on the USD/JPY at these levels, noting that our proprietary contrarian Speculative Sentiment Index shows trading crowds remain heavily net-long the US Dollar against the Japanese Yen with 5.6 traders long for every 1 that is short. However if sovereign debt concerns continue to mount next week, risk aversion flows could continue to prop the yen, sending the USD/JPY pair lower. Interim support for the pair rests at 80.30 followed 79.65 and 78.80. A break here targets the 38.2% Fib extension at 78.35. Topside resistance is eyed at 80.70, backed by the 23.6% Fib retracement taken from the March record lows at the 81-handle. Subsequent ceilings are seen at 81.70 and 82.20.

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