Fundamental Forecast for Japanese Yen: Neutral
- Japanese Yen might have set an important low, what are the trade setups?
- Strong outperformance likewise warns of JPY strength (USDJPY weakness)
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The Japanese Yen finished the week almost exactly where it began in a quiet week of trading. Yet the coming week’s Bank of Japan interest rate decision could finally force the JPY out of its tight trading range through 2014.
A relatively empty week for G10 economic event risk means focus will remain almost solely on the upcoming BoJ interest rate decision. Aggressive BoJ policy made the Japanese Yen the worst-performing G10 currency in 2013 as the bank printed money in a bid to lift the country out of deflation. Whether or not they continue to do so in 2014 could ultimately decide whether it finishes another year sharply lower or simply retraces previous declines.
And indeed Yen traders will listen closely to the Bank of Japan’s policy statement and Governor Kuroda’s planned press conference for clues on whether further policy easing is likely. Fresh action seems unlikely as core Consumer Price Index inflation recently hit a 5-year high. Yet many speculate that a recent increase in the Japanese Sales Tax may prompt the central bank to ease policy in a bid to keep consumption high.
If Kuroda makes explicit reference to the consumption tax as a clear risk to inflation, the Japanese Yen might suffer as traders anticipate further easing. We think a more hawkish shift in response to higher CPI inflation seems unlikely, but any such rhetoric might have the opposite effect and send the JPY higher (USDJPY lower).
From a technical trading perspective, our Senior Market Strategist believes that the USDJPY must soon trade above ¥105.55 to cement the case for further gains (Yen losses). Yet continued consolidation below multi-year peaks may warn that the next USDJPY is in fact lower; ¥103.35 is our Strategist’s pivot to the downside.
It is shaping up to be an important week for the Yen, and indeed the coming days and weeks could define USDJPY direction for all of 2014. - DR