Fundamental Forecast for Japanese Yen: Bearish

The Japanese yen advanced 0.64% against the dollar this week as trader’s jettisoned the greenback on concerns that the economic recovery in the world’s largest economy may be faltering. The yen was weaker at the start of trade this month after a disappointing industrial production report showed a year on year contraction of 14%, missing consensus estimates that called for a loss of 12.4% y/y. However stronger reads on housing starts and capital spending coupled with haven flows sparked by a string of weak US economic data saw the yen gather pace, with the USD/JPY pair breaking below the 80.70 support level.

Concerns over the US deficit were multiplied this week after Moody’s cited that it would put the current Aaa rating on review if policy makers were unable to come to a consensus on the nations mounting debt. Coupled with a string of weaker than expected economic data and Friday’s dismal Non-farm payroll report, the dollar may continue to see further weakness.

Event risk for the yen mounts next week with the current account figures on Tuesday followed by the 1Q GDP print on Wednesday. With the isle-nation having fallen back into recession after the devastating March earthquakes, traders will be closely eying the data for a better gauge of the real impact of the disaster. Consensus estimates call for an annualized print of -3.1%, an improvement on the previous read of -3.7%, while the quarter on quarter print is expected to come in at -0.8%, from -0.9% q/q. A weaker than expected read on the data could shy investors away from the yen on concerns regarding the strength of the real economy.

The USD/JPY pair briefly touched near one month lows just shy of the 80-handle on Friday. Key support is eyed at the figure, coinciding with the 38.2% Fibonacci extension taken from the April and May crests. A break below this key level eyes targets lower at 79.30, the 79-handle, and the 61.8% Fibonacci extension at 78.60. However it’s worth noting that a move below 80 sees an increased likelihood of intervention from the Bank of Japan as a stronger yen will weigh on exports. And with the Japanese economy on shaky ground, the central bank may move on the yen at much earlier levels than anticipated. Topside resistance stands at 80.80 backed by the 81.20 and 81.50.

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