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Yen Weekly Outlook 1/4: Moving On USD Events, Risk Sentiment

 

 

USD/JPY  15 DEC 31

Summary

-           Key Events: None- Likely to trade off USD data, risk sentiment

-          Pair continues to show strength despite USD pullback, suggesting more upside

-          With the USD/JPY pair at decade lows, odds favor more upside, barring a major pullback in risk assets.

Analysis

It is easy to go into 2010 bearish the Yen considering the recent actions and rhetoric from the BoJ. The central bank announced a 10 trillion Yen lending program and signaled that fighting deflation is their primary concern with the statement that the BoJ “does not tolerate a year-on-year rate of change in the CPI equal to or below zero percent.” Therefore, the policy makers aren’t expected to raise rates until inflation becomes a concern which they predict will be subdued until March 2012. The greatest case can be made for taking a long dollar position against the Asian currency as the greenback is starting to gain favor with the outlook for U.S. interest rates rising. The dollar has been the primary funding currency in 2009 and as traders start to repay their borrowings, demand for the reserve currency will drive its appreciation higher. Theoretically, we should see investors then look to finance their future investments by borrowing Yen increasing its supply and lowering its value. The too-obvious nature of the trade leaves us uncomfortable and calls for a counter argument. However, considering that current levels have only been seen twice in the last thirty years, it is difficult to make a case that downside risks are greater. Yet, any signs that a double dip global recession is under way could send the pair to test the 1995 low of 79.70.

However, we may need to see the U.S. credit status deteriorate for it to be surpassed as the safe-haven currency of choice. Chinese growth put the entire Asian economy back on its feet and the resulting demand for Japanese goods could raise its own growth and inflation outlooks. In a best case scenario that would be toward the end of 2010 which leave plenty of time to make profits on a bullish USD/JPY position. I would wait for A break above trend line resistance (8/15/08, 8/7/09 high) would trigger a bullish trade with the initial target at 101.43-4/6 high, followed by 110.65-8/15/08 high.

Events

Unlike other countries, there are no major economic releases from Japan next week. This means that USD/JPY  will primarily trade off U.S fundamentals. However the ongoing developments for Japan Airlines could also affect how the JPY trades. In the meantime, Japanese traders will have to wait another week before major economic data will be released from Japan.

DISCLOSURE: NO POSITIONS