Forex Investment and Currency Trading

YEN 1 – 3 Month Outlook

JPY was the third worst performing G10 currency (after NZD and CAD) through the course of June, with USD/JPY hitting a succession of three months highs and EUR/JPY hitting a new record high before correcting somewhat lower at the tail end of the month. In part, JPY weakness seems to reflect the currency adopting the role of “path of least resistance” for USD appreciation in the way EUR did when USD was falling. USD’s appreciation since March has in part reflected the increasingly hawkish stance of the Fed and this has been almost matched by the ECB and other major central banks. In Japan, in contrast, expectations of future rates have barely moved through the course of Q2 leaving USD/JPY as a fairly “clean” way to play expectations of tighter Fed policy. JPY is on a negative stance both through USD/JPY and on the major crosses. As the price action of the last couple of days illustrates, however, the view on JPY is vulnerable to the ebb and flow of market risk aversion. Currently, markets are moderately risk averse, primarily reflecting the sell-off in global equity markets in late-June. Should this trend continue, further near term JPY strength will result. In these circumstances, a close below support at 106.47 would favour a deeper sell-off toward 105.02 and 102.68 before another recovery takes place. A double top at 108.58 serves as strong resistance, along with 110.10.

YEN 6 – 12 Month Outlook

Beyond the short term trend in market risk appetite and general USD direction, fundamentals are still JPY-negative. In particular, despite the financial turmoil of the last year, retail investors have shown no let-up in their demand for overseas bonds in high yielding G10 markets in particular. Moreover,
with US interest rates having troughed, upward pressure on JPY from reduced institutional hedging is likely to diminish. Technically, the rejection of support at 101.28 and 95.88 on a monthly closing basis has set the stage for a rebound to nearby resistance at 108.80. A break above this level would
then target 111.63.