US Dollar - Japanese Yen Monthly 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 79.75. 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 count better as complex 3's. Expect additional weakness to at least 85 while price remains below 91.67. The pair would then be susceptible to a small 4th wave before wave 5 completes the multi year decline. The bottom line is that the USDJPY remains bearish and should continue lower, albeit not in a straight line.
US Dollar - Japanese Yen Interest Rate Forecast
The US Dollar/Japanese Yen pair has moved very much independently of US Federal Reserve and Bank of Japan interest rate expectations. The Dollar and the Yen are now the two of the three lowest-yielding G10 currencies, and it is subsequently unsurprising to note that interest rate expectations have had little impact on USD/JPY price action. Instead we see that broader trends in financial risk appetite have far and away had the most impact on all Japanese Yen currency pairs; the USD/JPY is certainly no exception. Given such outlook, we have little reason to believe that current forecasts for Bank of Japan and US Federal Reserve interest rate targets will have noteworthy influence on the USD/JPY.
That being said, we note that the US Dollar is expected to regain a very marginal yield advantage over the Yen in the coming 12 months. The Fed's aggressive rate cuts completely erased the USD's once-sizeable rate differential against the JPY-thereby removing a key pillar of support for the USD/JPY. Overnight Index Swaps predict that the Dollar will carry an interest rate 44 basis points higher than the Yen in 12 months' time, but it is doubtful that this will have a meaningful impact on the highly risk-sensitive currency pair.
US Dollar - Japanese Yen Valuation Forecast
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 the likelihood that it will lag in seeing a recovery behind that of the US 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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