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Yen on the Verge of Huge Moves ahead of Fed, but Which Direction?

Yen on the Verge of Huge Moves ahead of Fed, but Which Direction?

David Rodriguez, Head of Product
Yen_on_the_Verge_of_Huge_Moves_ahead_of_Fed_but_Which_Direction_body_Picture_1.png, Yen on the Verge of Huge Moves ahead of Fed, but Which Direction?

Yen on the Verge of Huge Moves ahead of Fed, but Which Direction?

Fundamental Forecast for Japanese Yen: Bearish

The Japanese Yen surged against the US Dollar (ticker: USDOLLAR) and took top spot among all G10 forex counterparts on an important week for Japan’s economic data. Next week promises pure fireworks, and we’re looking at key price levels for the next USDJPY trade.

It’s shaping up to be a make-or-break week for the Yen as we look forward to a critical US Federal Reserve (FOMC) interest rate decision, US Q2 GDP growth figures, highly-anticipated US Nonfarm Payrolls data, and a scheduled speech from Bank of Japan Governor Kuroda.

A particularly large gain in one-week volatility prices emphasizes that traders are preparing for big moves in the USDJPY and other Japanese Yen pairs. The next question is obvious: can we predict where the JPY might go?

BoJ Governor Kuroda starts the week with a scheduled speech on Sunday night/Monday morning when he could hint on further guidance on monetary policy. Kuroda’s aggressive Quantitative Easing measures got a vote of confidence as recent Japanese CPI data showed inflation for the first time in over a year. Yet Kuroda will almost certainly worry that a recent jump in global bond yields and particularly those in Japan may limit the effectiveness of policy easing.

Given that short-term interest rates are already at zero, there’s speculation that the BoJ governor could state that policy will remain extremely easy for “an extended period of time.” If he says this, expect JPY weakness (USDJPY strength). If he doesn’t, the opposite may occur and the USDJPY may fall further off of recent peaks.

The biggest Yen and broader FX volatility may nonetheless come on a highly-anticipated US Federal Open Market Committee interest rate decision due Wednesday—likely to force substantial moves across all USD pairs. The US Dollar/Japanese Yen exchange rate has proven the most sensitive to recent shifts in FOMC rhetoric. US yields have been the most important driver of Dollar moves in recent history.

Will Fed Chairman Bernanke and the broader FOMC hint at the so-called “taper” of Quantitative Easing purchases? That’s the critical question on every trader’s mind, and any surprises could have a substantial impact on the Yen. If Wednesday morning’s US Q2 GDP data surprises to the topside and the FOMC hints at tapering sooner than expected, expect the USDJPY to rally sharply.

Friday’s US Nonfarm Payrolls data release rounds out the huge week in FX markets, and the fact that the Fed will have already met on the week may take some of the “sting” off of the NFPs release. Rest assured, however, that any substantively above-forecast results could have a similarly significant impact on the USDJPY. Consensus currently calls for a solid jobs gain and a minor drop in Unemployment. But NFP figures are notoriously difficult to predict—expect fireworks on surprises.

It’s shaping up to be a critical week for the Yen, and we’re watching key price levels for the next USDJPY trade. The fact that the Bank of Japan stands ready to keep policy easy for a long time should keep the Japanese Yen under pressure for some time to come. We might treat any substantial Japanese Yen advance (USDJPY pullback) as an opportunity to sell. - DR

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.