Fundamental Forecast for Japanese Yen: Neutral

The yen advanced more than 1.8% against the greenback this week as traders sought refuge amid mounting concerns that the US may default for the first time in the nation’s history. Further supporting the yen was economic data out of Japan, highlighted by stronger than expected retail trade report, small business confidence data, housing starts, and employment figures. The data suggests that the economy may be on proper footing as the isle nation struggles to recover from the crippling March disaster. However weaker than expected prints on industrial production and overall household spending coupled with a rapidly appreciating yen, fueled speculation that the underlying metrics of the economy may still be under pressure.

But as the yen continues to appreciate, traders remain wary of a possible central bank intervention after Japanese Finance Minister Yoshihiko Noda cited that, “markets are diverging recently from the strength of the actual economy.” Noda added that, “Considering such a sever condition, I will take appropriate actions while cooperating with the Bank of Japan.” The remarks come just days after BoJ board member Kamezaki urged that yen gains could hurt exports and corporate profits while weighing on sentiment. The statements fueled intervention concerns, which may have slowed the yen’s advance in and of itself.

Next week’s economic docket is highlighted by the June labor cash earnings report, the BoJ rate decision, and the June learning index. Cash earnings are exacted grow by 0.4% y/y, a slight easing from the previous 1.0% y/y print. While Bank of Japan is expected to hold it’s the benchmark interest rate at 0.10% through the end of 2012, investors will be lending a keen ear to the accompanying statement after the central bank upped its economic forecast earlier this month, citing, ”economic activity is picking up with an easing of the supply-side constraints caused by the earthquake disaster.” If officials continue to talk up the economic assessment, traders may begin to discount the possibility of further easing measures from the BoJ, and accordingly the yen may stay well supported at these levels. Japan’s docket finishes up the week on Friday with the June leading index. Consensus estimates call for a print of 103.4, up from a previous read of 99.6.

With concerns over the US budget deficit and debt limit dominating headlines, haven flows have continued to be diverted into the yen and the swissie as traders remain reluctant to hold the greenback on fears of a possible default. But as the yen advances, investors remain poised as Japanese officials begin to take note of the yen’s rapid appreciation. The threat of a central bank intervention should limit intra-day yen advances while the underlying trend continues to favor dollar weakness.

The USD/JPY pair has continued to trade within a descending channel dating back to the 18th of July as improving growth prospects in Japan and mounting concerns over the debt situation in the US and Europe saw traders seek haven in the low yielding yen. On Friday, the pair broke through key support at the 61.8% Fibonacci extension taken from the July 8th and 19th crests at 77.50 level before finding solace just below the 77-figure where interim support now rests. A break here sees downside targets at trendline support of the descending channel formation, currently at 76.80, backed by the 100% Fibonacci extension at 76.35. Topside resistance is eyed back at the 61.8% Fib at 77.50 backed by 77.80 and the 78-figure.

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