(MENAFN - DailyFX)
US Dollar / Japanese Yen Monthly Technical Forecast
The market looks to be in the process of carving out a material base, and we project significant upside over the coming months. Look for a higher low now in the 88.00 area, to be confirmed on a break back above 95.00. Above 95.00 should then accelerate gains back above 100.00. Only a weekly close below 88.00 would concern and give reason for pause.
US Dollar / Japanese Yen Interest Rate Forecast
Considerable deterioration in US Federal Reserve interest rate forecasts has coincided with noteworthy US Dollar declines against the Japanese Yen. Yet the causal link between the two is far from clear, and we would argue that broader shifts in financial markets have played a more significant role in Japanese Yen rallies. Indeed, the rolling correlation between the USDJPY and the US S&P 500 index now trades near its highest levels since the height of the financial crisis in late 2008—emphasizing the effect of ‘risk’ flows on the JPY.
Paltry interest rate forecasts should theoretically limit Japanese Yen strength. Of course it is critical to underline that moves in the S&P 500 and other ‘risk’ barometers maintain far more important influence over the USDJPY. We will accordingly place less weight on shifts in Fed and Bank of Japan interest rate expectations.
US Dollar / Japanese Yen Valuation Forecast
USDJPY Valuation Forecast: Neutral
Prices continue to present few trading opportunities from a valuation standpoint with spot trading just 3 percent below the PPP-implied exchange rate. Our long term fundamental bias favors gains but another flare-up in risk aversion may push the currency higher as traders unwind carry trades. Indeed, with China proactively moving to slow its economy amid fears of asset bubbles and runaway inflation and the EU hamstrung, the US is left as the sole major driver of global economic recovery; if the States are unable to shoulder this burden and the rebound falters, a renewed flight out of risky assets promises to send the Japanese unit higher. Political uncertainty presents a wildcard after Japanese PM Yukio Hatoyama resigned amid slumping poll results just six weeks ahead of midterm elections. These complications and the absence of an attractive valuation gap hint it to be prudent to remain on the sidelines for the time being.
What is Purchasing Power Parity?
One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exch