US Dollar Japanese Yen Exchange Rate Forecast

US Dollar / Japanese Yen MonthlyTechnical Forecast

Monthly Chart

Prepared by Joel Kruger

There is no evidence of the desire for the market to establish any form of a meaningful bottom despite the break to fresh multi-year lows, and the risk from here are for additional declines below 83.00 over the coming sessions. However, cyclical studies are starting to look stretched and we like the idea of buying on dips below 83.00 in anticipation of a much needed and healthy corrective bounce. Ultimately, the longer-term downtrend remains intact until a break back above 95.00, but aggressive players may want to consider long positions on dips from here.

US Dollar / Japanese Yen Interest Rate Forecast

A continued downtrend in US Federal Reserve interest rate expectations has coincided with a similar decline in the US Dollar/Japanese Yen pair. Though we would argue that it was not necessarily yield forecast downgrades that led to USDJPY weakness, the moves line up far too well to cast it off as mere coincidence. Overnight Index Swaps now leave US Dollar and Japanese Yen benchmark rates essentially equal through the coming 12 months. Both the Bank of Japan and the US FOMC are expected to leave rates near zero, and it would take a material shift in yield expectations from either central bank to spark similar interest rate-driven trends in the USDJPY.

Given that interest rates cannot feasibly drop below zero, markets would need to upgrade BoJ or Fed rate expectations to force moves for the USDJPY. Though situations can and do change frequently, such an occurrence seems very unlikely. As such, broader financial market trends will likely be a more significant determinant for the USDJPY than interest rates onto themselves.

US Dollar / Japanese Yen Valuation Forecast

USDJPY Valuation Forecast: Bullish

The Yen has pushed deeper into overvalued territory as increasingly acute risk aversion spurs the unwinding of carry trades typically funded in the perennially low-yielding currency. Sagging US yields have not helped considering spot remains closely correlated with the return on the 2-year Treasury note. Looking ahead, both of these factors are likely push Yen higher and USDJPY lower in the medium term as mounting evidence of a global economic slowdown in the second half of the year encourages an exodus out of risky assets and into safer ones. This is likely to keep carry trades under pressure all the while bond prices rise, sending yields lower still. Longer term, our outlook continues to call for USDJPY upside, but a deeper plunge is likely before the turnaround materializes to give traders a larger valuation gap to be exploited.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.