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Japanese Yen Not Done Yet - Potential for Further USDJPY Weakness

By , Quantitative Strategist
12 July 2013 22:53 GMT
Japanese_Yen_Not_Done_Yet_-_Potential_for_Further_USDJPY_Weakness_body_Picture_1.png, Japanese Yen Not Done Yet - Potential for Further USDJPY Weakness

Japanese Yen Not Done Yet - Potential for Further USDJPY Weakness

Fundamental Forecast for Japanese Yen: silver;">Neutral

US Federal Reserve Chairman Ben Bernanke ended the Japanese Yen’s losing streak against the US Dollar, sending the USDJPY lower for the first week of the past four and leaving us in favor of further short-term declines.

The USDJPY looked all-but-certain to rise further given a clear Dollar uptrend and consistent Yen sell-offs, but inaction from the Bank of Japan and the Fed Chairman’s rhetoric simultaneously put a stop to both. Why?

The BoJ made it relatively clear that it could, if conditions warranted, boost its hyper-aggressive Quantitative Easing measures. Yet a relatively upbeat assessment on the domestic economy suggests that Bank of Japan Governor Kuroda sees little reason to add further fuel to the QE-driven Yen sell-off. In other words: any JPY weakness (USDJPY strength) might need to be a result of US Dollar rallies.

Bernanke’s recent rhetoric had a fairly different effect: he backtracked on his “Taper” bombshell from the Federal Open Market Committee’s June 19th meeting and raised the probability ofcontinued Quantitative Easing. The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) saw its sharpest 3-hour decline since 2011 following Bernanke’s comments, and indeed an important reversal in US Treasury Yields and other markets suggest the Greenback may fall further.

The USDJPY remains especially sensitive to shifts in US yields and to any shifts in FOMC policy, and that makes the coming week’s Bernanke testimony to Congress the most potentially market-moving event on the calendar. The so-called Humphrey Hawkins testimony is when legislators from both chambers of the US legislature ask questions of the Fed Chairman.

It normally isn’t a time for any new announcements on policy, but it’s also clear that any and all hints of policy shifts can have dramatic effects on the USD and Japanese Yen. It’s likewise worth noting that the recent Bernanke-driven Dollar sell-off occurred during the Question and Answer session of his scheduled speech—not the prepared statement.

Looking beyond the US Federal Reserve, Japan’s economic calendar features the Minutes from the BoJ’s most recent meeting and some second-tier data releases. The Bank of Japan failed to elicit much of a reaction as it kept policy unchanged and essentially met market expectations. It’s unlikely the minutes from the same meeting will change that, and the main focus remains the US Federal Reserve and a number of US economic data releases in the days ahead.

Last week I wrote that any important USDJPY pullbacks might represent long-term buying opportunities, and I still think that’s true. But it’s important to note the considerable risk of Dollar weakness through the coming days, and we’d need to see concrete signs of Dollar turnaround before buying into its longer-term uptrend. –DR

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12 July 2013 22:53 GMT