USDJPY Monthly Technical Forecast
Continues to consolidate in choppy fashion following the March break of the major 87.15 double bottom neckline at 94.60. Ultimately, any setbacks are seen well supported towards the neckline, which now acts as former resistance turned support, ahead of an eventual test of the measured move double bottom objective in the 104.00 area. The market has finally broken back above the daily Ichimoku cloud which reaffirms our bullish outlook to 104.00. Any moves beyond 104.00 are however seen limited with the longer-term structure still bearish and favoring a fresh lower top ahead of the next major downside extension below 87.15.
US Dollar/Japanese Yen Interest Rate Forecast
US Dollar/Japanese Yen interest rate forecasts have remained relatively stable as of late, and it is easy to see that yields have had little impact on USD/JPY price action. Outlook has similarly limited relevance to USD/JPY forecasts, but it serves to note that US equity markets and broader risky asset classes remain sensitive to Federal Reserve policy announcements. With that in mind, we will keep a close eye on market reactions to myriad Fed announcements.
Not to be outdone, the Bank of Japan has certainly moved domestic markets with its Quantitative Easing plans. Traders may nonetheless focus on Ministry of Finance rhetoric—especially as it relates directly to the Japanese Yen. Former finance minister Eisuke Sakakibara claims that the Japanese economy is in far worse condition than its US counterpart, and the USD/JPY may subsequently rise to 100-110 through the foreseeable future. Of course, it serves to note that Sakakibara likewise claimed that the USD/JPY could hit 80.00 back in November, 2008.
US Dollar – Japanese Yen Valuation Forecast
The Japanese Yen is effectively at its “fair” value against the US Dollar. However, both the yield outlook and comparative economic growth expectations are biased in favor of the greenback. Indeed, the States are forecast to outpace Japan’s performance both this year and in 2010. This suggests a broadly bullish bias for USDJPY in the weeks and months ahead, making a trade at current levels unattractive from a valuation standpoint. We remain flat for the time being until a cleaner mispricing presents itself.
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 pairs that are undervalued against their PPP exchange rate have the size of the value gap denoted in RED, while those that are overvalued are denoted in GREEN.
