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JPY Still at Risk for Larger Correction on Fed Testimony, Risk Trends

JPY Still at Risk for Larger Correction on Fed Testimony, Risk Trends

2014-02-07 23:56:00
David Song, Currency Strategist
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JPY_Still_at_Risk_for_Larger_Correction_on_Fed_Testimony_Risk_Trends_body_Picture_5.png, JPY Still at Risk for Larger Correction on Fed Testimony, Risk Trends

Fundamental Forecast for Japanese Yen: Neutral

The USDJPY climbed to a freshly month high of 102.57 following the dismal Non-Farm Payrolls report, but the pair may reverse course next week should the Fed’s Humphrey-Hawkish Testimony raise bets of seeing another $10B taper at the March 19 meeting.

Indeed, there’s growing speculation that the Federal Open Market Committee (FOMC) may take a less-aggressive approach in normalizing monetary policy amid the recent slowdown in job growth, and we may see the central bank implement a more dovish twist to its forward-guidance or even opt for a smaller series of reductions in the asset-purchase program as Ms. Janet Yellen takes the helm.

Nevertheless, it seems as though the FOMC will stay on course as the committee anticipates a faster recovery in 2014, and the near-term rebound in the USDJPY could be cut short if we see a growing number of Fed officials call for an end to Quantitative Easing.

With that said, we will also keep a close eye on broader market sentiment given the strong correlation between the Japanese Yen and S&P 500, and a more material shift in risk trends may drag the USDJPY lower as market participants scale back their appetite for risk. As a result, the near-term correction in the dollar-yen may gather pace in the week ahead, and the pair may ultimately work its way back towards the 100.00 handle as the Relative Strength Index retains the bearish momentum from earlier this year. - DS

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