USDJPY Monthly Technical Forecast
Despite the latest sharp monthly reversal off of the 87.15 matched trend lows from December and January, the market remains confined to a prominent downtrend with the current rebound merely classed as corrective. A daily double bottom has been triggered, and ultimately we project additional gains back towards the 104.00 area (measured move objective/20-Month SMA), from where a fresh lower top is sought ahead of the next downside extension back below 87.15 to expose the 79.70 historic lows from April 1995.
US Dollar/Japanese Yen Interest Rate Forecast
The US Dollar/Japanese Yen pair continues to be unaffected by interest rate expectations between the Federal Reserve and the Bank of Japan. Traditionally risk sentiment has driven price action for the pair with risk aversion flows favoring the Yen. However, that relationship disappeared in February as the USD/JPY rallied despite a large sell off in global equity markets. A year-over-year fourth quarter contraction of 12.7% in GDP for the Japanese economy has put its safe-haven status in doubt.
The token 2 bps increase in Japanese interest rates expectations over the next twelve months based on Credit Suisse overnight index swaps, reminds us that the BoJ has traditionally kept rates near zero. Therefore, with the Fed funds rate expected to increase by 41 bps, we could see the Yen resume its position as a funding currency which could add to its weakness going forward.
US Dollar – Japanese Yen Valuation Forecast
The Japanese yen remains overvalued against the greenback even after posting an 8.32% loss during the month, and the USDJPY is likely to push higher over the near-term as the economic downturn in the world’s second largest economy intensifies. The dire outlook for future growth has certainly battered the profound correlation between the yen and the stock markets, and as the low-yielding currency’s safe-haven status comes under question, the dollar-yen is expected to strengthen further over the following month to retrace the sell-off from 2008.
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 exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.
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