Fundamental Forecast for Japanese Yen: Neutral

The yen has certainly seen its share of volatility this week as headlines dominated by the threat of a Greek default fueled haven flows. Although as it seems, the debt laden nation looks to receive the next tranche of aid from the EU/IMF, traders remain skeptical on whether the Greeks will be able to get their fiscal house in order. And while traders remain focused on the Eurozone for further developments, here in the US investors continue to prepare for the end of the central bank’s quantitative easing measures.

This week the Bank of England cited that further easing measures may be needed as the UK economy continues to see sluggish growth prospects. At the same time, the Bank of Japan is widely expected to move in to support its domestic market as the isle-nation struggles to deal with the devastation left behind from the March disasters. And with the Fed seen maintaining its zero rate policy through the end of the year, all indications suggest further slowing in growth and continued subdued risk appetite.

With the end of QE2 at hand, traders closely monitored Wednesday’s FOMC press conference where Fed Chairman Ben Bernanke pledged an end to further dollar diluting stimulus measures. Subsequently the dollar rallied with the Dow Jones FXCM Dollar Index (Ticker: USDollar) advancing more than 1% on the week, limiting the yen gains as a result of risk-aversion flows.

Japan’s economic docket next week sees a flurry of data with the May retail trade figures kicking off the week on Monday. Consensus estimates call for a print of -2.2%, a slight improvement from the previous read of -4.8%. Later in the week traders get a closer look at the domestic economy with industrial production, construction orders, housing starts, household spending, unemployment and the Tankan surveys all on tap. The data is expected to show that recent actions to stimulate the economy were insufficient given the shock underwent from the disasters earlier this year and is likely to prompt policy makers to implement stronger more significant measures. Given the amount of data on tap coupled with the dramatic downturn is risk appetite, the yen’s path over the next week remains uncertain.

Gains for the yen remained limited after numerous attempts to break below solid support at the 80-handle. Interim resistance for the USD/JPY pair is eyed at the 23.6% Fibonacci extension taken from the peaks of the wedge formation dating back to late May at 80.55. Subsequent ceilings are seen at 80.70, the 81-handle, and 81.60. Although the risk-off environment should tend to benefit the yen, rapid appreciation in the dollar and concerns of a Bank of Japan intervention may cap any major advances.

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