US Dollar/Japanese Yen Long-Term Exchange Rate Technical Forecast
Bigger picture, "a 4th wave triangle (that took 12 years) is complete at 124.30 as a 4th wave and the US Dollar/Japanese Yen is headed lower in a 5th wave (and terminal thrust) that will end below 81.12. One possibility is that the US Dollar/Japanese Yen decline from 124.20 is unfolding as an ending diagonal. The subdivisions of the drop from 124.30 to 95.71 certainly count better as a complex 3 and the drop from 110.69 is a 3 right now. The decline from 110.69 would be equal to the previous drop at 85.30. Expectations are for the decline to extend below there prior to finding significant support. Staying below 110.65 keeps the larger trend down.
US Dollar/Japanese Yen Exchange Rate Interest Rate Forecast
The US dollar has fallen substantially against the Japanese Yen, and the fact that the USD/JPY now carries a negative interest rate differential has arguably played a large part in sharp declines. The Japanese Yen spent a very long time with the dubious honor of holding the lowest short-term interest rate of any major world currency, and traders would often borrow Yen to fund purchases of its higher-yielding counterparts. Now that the US Dollar is in fact the world's lowest-yielder, we have seen a sizeable flight out of Japanese Yen short positions and into the equivalent in US Dollars. This dynamic will arguably keep the US Dollar/Japanese Yen exchange rate depressed for the foreseeable future, but it is unclear that it will be enough to force further losses.
In terms of interest rate expectations, traders predict that the USD/JPY yield differential will remain effectively unchanged through the coming 12 months. Such forecasts leave little bias for the US Dollar/Japanese Yen exchange rate, and we see little scope for interest rate-based moves in the USD/JPY outside of truly shocking developments.
US Dollar/Japanese Yen Exchange Rate Valuation Forecast
US Dollar/Japanese Yen Valuation Forecast: Bearish
The bottom line for USDJPY is little changed from last month: "A broad-based unwinding of the carry trade has seen the Japanese Yen become profoundly overvalued against the US Dollar." While continued pain in the stock market looks set to push the pair lower, it does stand to reason that at some point the sharp deleveraging we have seen will find a floor and the fundamentals will take over to erode the correlation between the Yen and stock markets. As this occurs, the dire state of the Japanese economy and its likelihood to lag in the recovery behind that of the US (for surely Japanese authorities have not been as aggressive or creative in tackling the problem as their American counterparts) have scope to send USDJPY higher.
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 the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.
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