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Yen to Face Growth Concerns- Will the BoJ Halt the Bullish Trend?

Yen to Face Growth Concerns- Will the BoJ Halt the Bullish Trend?

David Song, Strategist
Forex_Yen_to_Face_Growth_Concerns-_Will_the_BoJ_Halt_the_Bullish_Trend_body_ScreenShot309.jpg, Yen to Face Growth Concerns- Will the BoJ Halt the Bullish Trend?

Yen to Face Growth Concerns- Will the BoJ Halt the Bullish Trend?

Fundamental Forecast for the British Pound: Neutral

Although the Japanese Yen lost ground against its U.S. counterpart, the near-term correction in the USDJPY may continue to take shape next week as the pair persistently carves a series of lower highs paired with lower lows in August. However, the Yen may face additional headwinds going into the following week as the region’s trade deficit is expected to widen in July, while headlines surrounding fiscal policy may provide further weakness in the low-yielding currency as the new government plans to increase the sales tax for the first time in 15 years in order to address the budget deficit.

Indeed, Prime Minister Shinzo Abe appears to be stuck between a hard place and a rock as a rise in the sales tax heightens the risk of seeing a slower recovery, and the fiscal outlook may persistently dampen the appeal of the Yen as the new government struggles to draw up a credible solution to address the risks surrounding the region. In turn, the Bank of Japan (BoJ) may come under increased pressure to further embark on the easing cycle over the coming months, but Governor Haruhiko Kuroda may have little choice but to use verbal intervention to encourage an export-led recovery as there appears to be a growing rift within the central bank.

The Federal Reserve’s economic symposium in Jackson Hole Wyoming looks poised to heavily impact the USDJPY as Mr. Kuroda is scheduled to speak at the central bank conference kicking off of August 22, and the governor may continue to show his support for a higher sales tax to further combat deflation. In turn, a weakening outlook for growth along with dovish comments from Governor Kuroda may prop up the USDJPY in the week ahead, and we may see the pair breakout of the downward trend carried over from the previous month as the pair appears to be building a short-term base in August.

The USDJPY appears to have carved out a higher low amid the consecutive closes above the 23.6% Fibonacci retracement of the May decline (96.10-20) and the pair may continue to retrace the decline from earlier this month as it preserves the broader upward trendline dating back to February. For added confirmation, we need the relative strength index to breakout of the downward trend as well to see a more meaningful rebound in the exchange rate, and we will revert back to a ‘buy-the-dip’ strategy once the bearish momentum gives out. - DS

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