Last month, I warned that the Japanese yen may be approaching a ceiling, in spite of the significant growth we have seen in the JPY/USD this year.
When we look at the performance of the JPY/USD over the past couple of weeks, we have seen a significant decline - similar to the magnitude of decline seen by the EUR/USD, while the MXN/USD has seen a significant rise.
The reason I include the Mexican peso for comparison purposes is to illustrate the shift in risk sentiment that appears to be prevalent in markets right now. With both the ECB and Federal Reserve having signaled further quantitative easing is on the way due to low economic growth, this has made the euro and dollar less attractive given lower rate expectations. As a result, we have been seeing a resurgence in emerging market currencies.
Taking this shift in risk sentiment into account, I envisage that the yen will continue its decline against major currencies, at least in the short to medium-term. There is little case to be made for risk-off currencies if we are seeing a situation where “higher risk-higher rate” currencies are rebounding in demand.
That said, I expect that this is temporary. The prospect of a no-deal Brexit remains on the cards, and while there has been some resolution to US-China trade tensions, the situation is still unpredictable and this still remains a significant threat to economic growth.
Looking at the longer-term trajectory for the JPY/USD, we can see that while the currency has made short-term gains, it has largely been trading in a stationary manner since 2017:
From a technical standpoint, I envisage that the JPY/USD could fall to a level of 0.009 that was last seen in May of this year.
At this level, I expect that the JPY/USD could see a rebound if global growth concerns remain. At this time, I take the view that the yen is overvalued in the short-term, and the 0.009 level against the greenback could be a better entry point for a long position.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.