Fundamental Forecast for Japanese Yen: Neutral

The yen continued to slide against the greenback this week as one of the world’s largest exporters confirms a double-dip back into recession. Japan’s Q1 GDP figures showed the economy contracting 0.9% q/q, far surpassing estimates that called for a print of just -0.5% q/q. Annualized GDP came in even weaker with a print of -3.7%, missing estimates for a read of -1.9%. The data came just days after remarks by Bank of Japan Governor Masaaki Shirakawa slammed the yen, citing that the domestic economy remained in a “very severe” state after the devastation caused by the March disasters. Later in the week, disappointing prints on capacity utilization, industrial production, and the all-industry activity index confirmed the downturn and accelerated the yen’s losses.

The USD/JPY pair maintains its position in the ascending channel dating back to the May 5th low. Looking forward, the pair will eventually need a break of the key 82.20 level for the dollar to see further gains. Topside targets in this event are eyed at 82.50 and the 38.2% Fibonacci extension taken from the March 16th and May 5th troughs at the 83-handle. Interim support is seen at 81.50 backed by the lower bound trendline at 82.30. A break of the formation eyes targets at the 81-handle and 80.50. Note that the contrarian Speculative Sentiment Index sees traders remain net long, with nearly 3.5 traders long the dollar versus the yen for every one trader that is short.

Next week’s economic docket is highlighted by the May CPI report on Thursday. Consensus estimates call for a print of 0.1% y/y, up from a previous read of -0.1% y/y, with core CPI expected to hold at 0.2% y/y. The data is followed by the April retrial trade report which is expected to decline by 6.2% y/y, up from a previous print of -8.2% y/y. With Japan now sliding back into recession, economists note that the decline should be well supported so long as the yen remains stable. FX intervention therefore mounts with a sudden appreciation in the yen and should keep the bulls at bay. We remain neutral on the USD/JPY pair here with biased on the upside until a confirmed break of the 82-handle or the 81.30 support level. -MB

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