USDJPY: US Dollar Japanese Yen Exchange Rate Forecast

US Dollar / Japanese Yen Technical Forecast

Weekly Chart

Prepared by Jamie Saettele, CMT

The USDJPY is probing its March low. The inability of price to hold up following recent intervention efforts along with lack of strength as equities have bounced from the lows suggests a heavy market that may evolve into a plummeting market. RSI continues to test the 30 level (weekly), warning of a tumble and eventual oversold reading. As long as price is below 8025 (post intervention high), I view the USDJPY as particularly vulnerable.

US Dollar / Japanese Yen Interest Rate Forecast

US Dollar / Japanese Yen Interest Rate Trading Bias: Neutral

Negligible central bank interest rate differentials and forecasts leave little clear bias for the US Dollar/Japanese Yen. Yet an overall downtrend shows few signs of slowing, and we have little reason to call for any significant reversal. The more significant USDJPY mover remains the spread between US Treasury bond yields and Japanese Government Bonds.

A substantial downtrend in the US 10-Year Treasury Yield has left it hovering near record-lows (much like the USDJPY). One gets the sense that we may need to see a noteworthy upgrade in US interest rate expectations and broader fundamental outlook for any real moves in the bond yield or the US Dollar/Japanese Yen exchange rate.

US Dollar / Japanese Yen Valuation Forecast

USDJPY Valuation Bias: Bullish

The Yen remains significantly overvalued against the US Dollar, albeit meaningfully less so than most of the greenback’s major counterparts with spot just 16.6 percent above the PPP-implied fair value. Significant downward pressure remains as an eroding global economic growth outlook stokes risk aversion, sending capital out of stocks and into Treasury bonds. This boosts bond prices while weighing on yields, pushing USDJPY lower through the pair’s historic correlation with the return on US Treasuries. While the threat of renewed intervention from Japanese authorities runs counter to further downside, such efforts have proved successful only over the short term, hinting market pressure ought to overwhelm policymakers’ efforts. On balance, while the purely valuation-based bias is bullish, it seems now is not the time to capitalize on that view with the disparity likely to widen further before an attractive long entry presents itself.

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.