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Japanese Yen Remains Strong Sell Until these Factors Change

Japanese Yen Remains Strong Sell Until these Factors Change

Fundamental Forecast for Japanese Yen: Bearish

The Japanese Yen broke convincingly lower versus the US Dollar as the USDJPY set its single-largest weekly advance on the year. We believe the currency pair remains an attractive buy on the impressive break higher.

What drove the Yen and, more importantly, what may cause further volatility in the days and weeks ahead? Put simply: a divergence. On the one hand you have the Bank of Japan widely expected to ease monetary policy further through the end of the year. Across the Pacific Ocean, the US Federal Reserve is actually tightening monetary policy. The interest rate-sensitive USDJPY will likely track higher as the two central banks go in opposite directions.

The week ahead should prove particularly interesting given a highly-anticipated US Federal Open Market Committee monetary policy decision, while two planned speeches from BoJ Governor Kuroda could likewise drive USD/JPY volatility. Many traders expect FOMC officials will raise growth and employment forecasts and remove the key term “for a considerable time” from the future of interest rate hikes. Strong Dollar gains leave room for disappointment, but we think recent economic data supports calls for further tightening in monetary policy.

BoJ Governor Kuroda is comparatively less likely to force big moves in the USDJPY, but traders will pay close attention to any hints that the Japanese central bank will boost quantitative easing purchases through upcoming meetings. Note: unless he specifically says the BoJ will not do more QE, we believe a JPY bounce seems relatively unlikely.

The only caveat to our calls for continued USDJPY strength is simple: markets can’t go in one direction forever. It’s entirely possible and perhaps even likely that the Japanese Yen corrects higher (USDJPY lower) before its next major move. Yet remaining above key resistance-turned-support at ¥105.60 leaves us focused on continued USDJPY strength. - DR

--- Written by David Rodriguez, Quantitative Strategist for David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.

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