Fundamental Forecast for Japanese Yen: Neutral

The yen advanced more than 2% against the greenback this week as the dollar came under pressure on concerns over the looming debt limit deadline. The gains come on the back of haven flows accelerated by concerns over sovereign debt downgrades and the threat of defaults in Europe. Economic data out of Japan also supported the yen’s rally with May Tertiary industry index and the June domestic GDP figures topping estimates. Industrial production and capacity utilization followed suit, besting expectations as the economy continues to gather pace in the wake of the March disasters.

As expected the Bank of Japan held interest rates at 0.10% with the central bank’s monthly economic report citing, “economic activity is picking up with an easing of the supply-side constraints caused by the earthquake.” Although some have postulated that the BoJ needs to expand monetary stimulus to support the weakened economy, the data continues to suggest the recovery is gathering pace and the BoJ may maintain its wait-and-see approach on additional stimulus measures. However as the yen climbs, speculation of a possible central bank intervention continue to mount as appreciation in the domestic currency weigh on the export-driven economy.

Next week’s economic docket is highlighted by the June merchandise trade balance figures and the May all industry activity index. Merchandise trade is expected to show the deficit narrowing to 250.4B yen, an improvement from the -474.6B print seen the previous month. Meanwhile, consensus estimates on the activity index call for a print of 1.8% m/m, up from a previous gain of 1.5% m/m in April. Weaker-than-expected prints here will once again see increased pressure on the BoJ to act and could threaten the yen’s recent run.

Looking ahead, the yen will be at the mercy of broader market sentiment as traders look for refuge in lower-yielding assets. The USD/JPY pair broke below a wedge formation dating back to late May on Monday before finding resistance at the 100% Fibonacci extension taken from the May 19th and July 7th crests at 78.85. Interim support rests here with subsequent floors seen lower at 78.50, the 78-figure, and the 161.8% Fib extension at 77.30. The pair is expected to continue to consolidate between the 76.4% and 100% extensions, noting topside resistance at 79.20 backed by the 61.8% Fib extension at 79.80 and the 38.2% extension at 80.40.

DailyFX provides forex news on the economic reports and political events that influence the forex market.