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Japanese Yen Looks Primed to Move. When, Where, and How?

Japanese Yen Looks Primed to Move. When, Where, and How?

2014-06-20 20:50:00
David Rodriguez, Head of Product
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Japanese Yen Looks Primed to Move. When, Where, and How?

Fundamental Forecast for Japanese Yen: Neutral

The Japanese Yen finished the week almost exactly where it began, but continued consolidation within a tight range suggests a breakout is inevitable. When, where, and how might the JPY move?

Record-low volatility for the Japanese currency leaves us looking for clues on when the Yen might finally break its recent range. Yet if there’s going to be a fundamental catalyst it could very well come on upcoming Japanese Consumer Price Index inflation figures. A key question remains whether the Bank of Japan will look to boost its aggressive Quantitative Easing measures.

BoJ Governor Kuroda emphasized the central bank is only halfway to achieving its inflation target and talk of pulling back monetary policy stimulus is premature. And indeed it might take a significant surprise in CPI inflation results to force a large reaction in the Yen. It is then little surprise to note that 1-week volatility prices on US Dollar/Japanese Yen finished Friday at record lows. Or in other words: traders have never bet on/hedged against slower JPY moves.

One crucial thing to understand about volatility is that it doesn’t stay high or low forever; it eventually returns to its long-term average. It’s with that in mind that we view a USDJPY breakout or breakdown as inevitable, and indeed our Senior Strategist highlights key price levels to watch through near-term trading.

It’s ultimately a fool’s errand to try and pick major market turning points, and traditional fundamentals give few clues on the Yen’s next moves. We’ll watch market reactions to economic data with interest, but it will likely require a broader shift in market conditions to force a large Japanese Yen move. Last week we argued that a Japanese Yen breakout might indeed spark a larger shift in forex market conditions. - DR

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