Medium-term USDJPY Projections
Our currency markets continue to be racked by volatility, driven by uncertainty in Europe and tepid attempts at a rebounding economic recovery on a global scale. For countries like Japan that have had both weak fundamentals and a major natural disaster on its plate, a strong national currency is no recipe for recovery. The Yen, however, much like the Swiss Franc, has continued to be the safe haven of choice, buffeted by the repetitious waves of risk aversion that sweep through the investment community at large. Despite central bank intervention, the Yen remains range bound.
Traders, exporters, and government officials alike are firming up their projections for the medium-term, but try as they might to wish it weaker, the Yen seems fixated on Post-War highs versus the U.S. Dollar. The diagram below presents the technical picture for the recent daily trading range for the "USD JPY" currency pair:
The Ichimoku trading indicator has been added to the above template to reflect a broader view of current circumstances. The Kumo Cloud has acted like a threatening storm of resistance to any attempts by the Bank of Japan to weaken the Yen above the low of 76.4 that was realised when the earthquake and tsunami took their toll back in March. In its latest attempt, the BOJ authorised the sale of over eight trillion in Yen securities, an easing action exceeding $102 billion that was put in motion on the last day of October.
This significant intervention seems to have been ample enough to pierce through the cloud of resistance, but the hoped-for trading volatility did not materialise, leaving the currency to rest temporarily upon support provided by the opposite side of the Kumo Cloud. The firmness of that support has deteriorated as expected by traders. If this indicator is correct in its outline of the near-term scene, then a year-end value in the 77 territory is to be anticipated.
Japan still has a long way to go in rebuilding its economic infrastructure. Recent forecasts for the entire year reflect a shrinking economy for the country, which slipped behind China during the year down to third position in the world. Auto-building and consumer electronics industries have posted lower earnings, made possible by positive repatriation gains of offshore funds at higher exchange rates. If exports are to rise, however, a weaker Yen is a must, and pressure on government officials continues to mount to effect real change in current valuations.
After the earthquake, a third recession in a decade gripped Japan, and energy shortages stalled any material recovery in the subsequent months. Speculation in the Yen has ensued, and traders question the resolve of the central bank to act assertively. Unilateral interventions appear to have no lasting value. Foreign currency reserves of $1.1 trillion, second only to China, provide a core of strength. From a longer-term perspective, Ayako Sera, a market strategist in Tokyo at Sumitomo Trust & Banking Co., believes that, "We’ll get to the phase of yen weakness at some point in the future given Japan’s weak fundamentals."
When does the longer-term become the medium-term? At some point, the fundamentals will drive Yen exchange rates, but for the present, the force of gravity seems eerily apparent in the technical chart presented above. Back in August, many experts had pegged 85 for a year-end valuation, yet the sluggishness of the global economy and continued fumbling in Europe have weighed heavy on the Yen, suggesting a level of 77 that may take months to dissipate. Open interest in the futures market still favours a stronger Yen, as well. The appetite for a weaker Yen has yet to materialise.