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Japanese Yen Losses Remain Likely, but What Could Change?

Fundamental Forecast for Pound:Bearish

The Japanese Yen finished the week marginally higher versus the US Dollar, but the fact that it trades near critical resistance (USDJPY at support) leaves it at risk. We’ll watch the coming week’s Bank of Japan interest rate decision with special interest.

We expect little change from the BoJ and indeed the Dollar/Yen exchange rate seems likely to stick to its year-to-date trading range. It’s with that in mind that we believe the US Dollar looks like a buy versus its Japanese counterpart. But what are the risks to that trade?

Markets have long waited for BoJ Governor Kuroda to signal further monetary policy easing is likely, and continued disappointments have kept the Yen from falling further versus the Dollar. Kuroda recently reiterated that the BoJ expects the domestic economy will continue recovering at a moderate pace and inflation will continue to rise.

The lack of urgency for further policy action will likely keep the JPY contained, but any hawkish surprises could force a significant USDJPY decline.

FX derivatives show that 1-week volatility prices on the Dollar/Yen continue to trade near record lows; if traders fear a hawkish shift from the Bank of Japan they’re certainly not showing it. There may be only so long the Japanese Yen can continue to stay below key highs, and the recent breakdown in the EUR/JPY acts as warning that miniscule price ranges can only last so long.

We remain ready for anything, but at this stage the USD/JPY seems likely to trade above key year-to-date lows at ¥100.70 through the foreseeable future.