Fundamental Forecast for Japanese Yen: Neutral

The yen advanced a modest 0.22% against a weaker greenback by the close of trade this week. The bulk of the losses for the dollar came on Monday when a sharp sell-off in risk assets fueled haven flows into the ‘safety’ of the yen. The dollar struggled to hold its ground for the remainder of the week as improved risk appetite saw both the yen and the dollar go on the defensive with traders favoring higher yielding assets like the aussie and the kiwi which were the top two performers against the dollar this week.

As expected the BoJ held interest rates on Friday, making no changes to its current monetary policy. However the central bank cited a firm warning regarding the increased risk of a global economic slowdown. Bank of Japan Governor Masaaki Shirakawa stated that, “The uncertain outlook for the global economy and instability in financial markets are underscoring the downside risks for Japan’s economy.” He went on to say that, “European financial markets remain tense, as there have been moves in money markets similar to those seen during the Lehman crisis. What’s different is that the creditability of government debt has become the target of market worries, and this has resulted in a bigger impact.” The governor highlighted a growing concern that the sovereign debt crisis in Europe may soon have a significant impact on the global economy if left unchecked, and with Japan’s interest rates already near zero, officials have little left in their arsenal to help support the economy should the recovery falter.

The economic docket for Japan next week is highlighted by the August trade balance figures on Monday and Machine orders on Tuesday. Consensus estimates call for a trade deficit of -¥692.3 billion, down from a previous surplus of ¥123.3 billion. The data would mark the 4th time this year Japan has run a trade deficit and may increase pressure on the central bank to further expand easing policies in the wake of the March disasters. Machine orders are expected to rise 3.9% m/m, up from a previous read of -8.2%, while the year on year figure is called lower with a print of -3.6%, down from a read of 4.0% a month earlier. The week wraps up with the August Tertiary industry activity index which is expected to slide by 0.3% m/m. The data comes on the back of a -0.1% m/m loss in July.

The USD/JPY continues to hold between the 38.2% and 23.6% Fibonacci extensions taken from the September 9th and October 2nd crests at 76.60 and 76.85 respectively. The pair is expected to continue to consolidate into the apex of a wedge formation dating back to the September 9th highs. Should risk sentiment shift next week on concerns over global growth prospects, the pair could see a downside break to test all-time yen highs below the 76-figure. However as the yen appreciates, so do fears of a possible currency intervention from the BoJ as a higher valued currency weighs on the export driven economy. A break below interim support at 76.60 eyes subsequent floors at the 50% Fibonacci extension at 76.35 and the 61.8% extension at 76.15. Topside resistance holds at 76.85 with a breach eyeing topside targets at 76.95, 77.25 and 77.70.

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