USDJPY: US Dollar Japanese Yen Exchange Rate Forecast

US Dollar / Japanese Yen Technical Forecast

Monthly Chart

Prepared by Jamie Saettele, CMT

There are signs that the long term USDJPY trend is reversing (from down to up). Those signs include bullish RSI divergence at the October low and a positive slope on the 13 week average. A push through the trendline that has defined the trend since the May 2010 high is required in order to inspire confidence in the upside. Objectives span the 8050-8300 range. Near term support is defined by trendlines from the October and November lows.

US Dollar / Japanese Yen Interest Rate Forecast

US Dollar / Japanese Yen Interest Rate Trading Bias: Bullish

Negligible central bank interest rate differentials and forecasts leave little clear bias for the US Dollar/Japanese Yen. The pair remains in a fairly obvious downtrend dating back to 2007, but we have recently seen evidence that it may be in the process of setting a long-term bottom.

US10-Year Treasury Note yields set a record low through September, but the key rate has since established two higher lows. The USDJPY has similarly set a record low through October and since trended steadily higher.

There is scope for higher US Treasury yields going forward, and the USDJPY could continue to climb off of recent lows amidst changes in key rate differentials.

View a guide on trading currencies using interest rate expectations.

US Dollar / Japanese Yen Valuation Forecast

USDJPY Valuation Forecast: Neutral

Source: Bloomberg

The Yen remains overvalued against the US Dollar but we are not expecting a meaningful correction for the time being as conflicting forces lock the currency in a narrow range below the 80.00 figure. On one hand, safe-haven flows continue to be attracted to the Yen’s ample liquidity and store-of-value properties (given a historically paltry inflation rate). On the other, the threat of intervention remains ever-present, spooking markets any time USDJPY descends toward the 76.00 level. On balance, we see it as prudent to stand aside for now until the Eurozone debt crisis plays out and risk aversion abates, opening the door for a fundamentally-driven USDJPY advance along with rising US Treasury yields.

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.