US Dollar Japanese Yen Exchange Rate Forecast

US Dollar / Japanese Yen Monthly Technical Forecast



Remains locked in a fairly intense downtrend and is currently in the process of attempting to carve out a fresh lower top below 110.70 (August 2008 high) by the 2009 highs from April at 101.45, ahead of the next downside extension below the historic trend lows from a few months back set at 87.15. The key level to watch below comes in by 93.55, with a break to accelerate declines and directly expose 87.15 further down. Back above falling trend-line resistance at 100.00 would however delay the bearish structure, while above 101.45 ultimately negates. In the interim, key levels to watch above and below come in by 98.90 and 93.85.


US Dollar / Japanese Yen Interest Rate Forecast



Interest rate traders forecast that the US Dollar yield advantage over the Japanese Yen will pick up significantly in the coming 12 months, but recently apathetic FX speculators have shown little interest in interest rate developments. The US Dollar/Japanese Yen exchange rate has instead moved off of shifts in global financial risk sentiment—especially as seen through key risk barometers such as the S&P 500 and Nikkei 225 indices. We predict this will continue to be the case through the foreseeable future.

Recent flare-ups in market tensions bodes poorly for the USDJPY pair; further equity market declines could fuel Japanese Yen appreciation. Further deterioration in risk sentiment could bring USDJPY losses, and it will be important to keep track of relevant indicators. Interest rate expectations, by comparison, are unlikely to influence FX market direction.


US Dollar / Japanese Yen Valuation Forecast



The Japanese Yen is effectively at its “fair” value against the US Dollar for the fourth consecutive month. However, both the yield outlook and comparative economic growth expectations are biased in favor of the greenback. Indeed, the States are forecast to outpace Japan’s performance both this year and in 2010. This suggests a broadly bullish bias for USDJPY in the months ahead, though any downward reversal in risky assets could stand to benefit the Yen as traders flock to the stand-by safe haven currency. On balance, current positioning does not offer an attractive mispricing to be exploited from a valuation standpoint; it seems prudent to remain flat for the time being until a cleaner disparity presents itself.

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.