Fundamental Forecast for Japanese Yen: Neutral
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Japan’s consumer-tax hike, which takes effect April 2014, certainly clouds the fundamental outlook for the Japanese Yen, while the technical formations highlight the risk for a major move as the USD/JPY remains stuck in the wedge/triangle from the beginning of the year.
Indeed, fears that the value-added tax (VAT) will slow the economic recovery may put increased pressure on the Bank of Japan (BoJ) to further embark on its easing cycle, and a meaningful shift in the policy outlook may generate a bullish breakout in the USD/JPY as it retains the upward trend carried over from 2013.
However, we may continue to see positive developments coming out of the Japanese economy as BoJ Governor Haruhiko Kuroda retains a positive outlook for the region, and the board may preserve its current policy throughout the medium-term as the central bank head sees scope to achieve the 2% inflation target as early as the end of FY 2014. With that said, easing bets for a further expansion in the BoJ’s asset-purchase program may continue to limit the topside for the USDJPY, and the pair may make another run at the 101.00 handle should it continue to carve a series of lower highs.
Beyond Japan’s economic docket, U.S Non-Farm Payrolls (NFP) may heavily impact the technical outlook ahead of the BoJ meeting on April 8 as the world’s largest economy is expected to add another 197K jobs in March, but we would need a meaningful deviation from the current forecast to see an impressive reaction as market participants weigh the outlook for monetary policy. In turn, we will stay flat and wait for a meaningful break on the USDJPY as it continues to consolidate with the wedge/triangle. - DS