USD/JPY Eyes August Low- Widening Surplus to Keep BoJ on Hold?USD/JPY Eyes August Low- Widening Surplus to Keep BoJ on Hold?

Fundamental Forecast for Yen:Bullish

A further deterioration in trader sentiment paired with an improvement in Japan’s Balance of Payments (BoP) may spur increased demand for the Yen and trigger another near-term selloff in USD/JPY as market participants scale back their appetite for risk.

With Japan’s adjusted Current Account balance expected to show a widening surplus in November, the Bank of Japan (BoJ) may continue to endorse a wait-and-see approach at the January 29 meeting as Governor Haruhiko Kuroda anticipates the region to achieve the 2% inflation target with the current policy. Even though the BoJ stands ready and willing to further adjust its quantitative/qualitative easing (QQE) program, the recent comments suggests that the bar remains high for the central bank to boost its asset-purchase program especially as the region avoids a technical recession in 2015.

At the same time, the fundamental developments coming out of the U.S. economy may also drag on the dollar-yen as the Advance Retail Sales report is expected to show a slowdown in household spending. The cautious tone laid out in the Federal Reserve Minutes accompanied by weak consumption figures may drag on interest rate expectations and generate additional headwinds for the greenback as the central bank doves favor stronger inflation before implementing higher borrowing-costs. Even though the Federal Open Market Committee (FOMC) stays on course to further normalize monetary policy in 2016, signs of a stalling recovery may prompt the central bank to adopt a dovish outlook at the January 27 interest rate decision as Chair Janet Yellen and Co. continue to gauge the risks surrounding the U.S. economy.

With USD/JPY failing to hold above the October low (118.05), the pair remains at risk of giving back the rebound from the August low (116.07) especially as the Relative Strength Index (RSI) pushes deeper into oversold territory. The RSI formation suggests a larger correction could be at hand as it retains the bearish pattern from back in November but, we will keep a close eye on the oscillator as it approaches the lowest reading since August.