1Finance

Japanese Yen Q1 2017 Forecast - Japanese Yen Poised to Gain Further For Three Key Reasons



Fundamental Analysis

• "The Bank of Japan started the year in fairly dramatic fashion as it cut its benchmark interest rate into negative territory, but the BoJ went on to disappoint those looking for further monetary policy easing through the rest of the year. This fact is especially surprising given that National Japanese Consumer Price Index inflation figures showed the country re-entered deflation through the first quarter. It was almost humorous to note the Bank of Japan forecasted inflation would hit 1.7 percent in 2017 while the median private forecast pointed to 0.9 percent growth. Officials finally posted a dramatic cut in inflation and growth forecasts at their July meeting, and further policy easing seemed inevitable."
• "Japan stands to gain if the United States’ Congress and President approve the much-heralded Trans-Pacific Partnership (TPP) trade agreement. Anti-trade sentiment has nonetheless come to the fore ahead of the US Presidential Elections in November, and ratification of the TPP is far from certain. Aggressive currency manipulation from the Japanese Government could further raise the ire of the US politicians and effectively kill the TPP in its tracks. The Japanese MoF has certainly warned it could intervene if the Yen continues to strengthen, but these political calculations make those threats considerably less credible. Failure to act would clear the USD/JPY to break and stay below ¥100."
• "The final wildcard for the Yen is not limited to Japan but especially relevant for its currency: will global financial markets remain stable? The near-term correlation between the USD/JPY exchange rate and the USS&P 500 Volatility Index (VIX)—also known as the “fear index”—recently hit its strongest in two years. The correlation has admittedly been volatile, and the USD/JPY shows little link to the VIX when the VIX is low. The fact the JPY surges (USD/JPY declines) when the VIX spikes higher helps to highlight the fact the Yen tends to strengthen in times of financial market turmoil. The recent jump in S&P volatility coincided with Yen strength, and any similar episodes of sharp S&P declines would also likely coincide with JPY gains."

Technical Analysis

• "USDJPY responded to a critical support confluence in the second half of the year around the 101-handle (100.71-101.26) – this region is defined by the 50% retracement of the 2011 rally, the 1999/2000 lows, former trendline resistance extending off the 1998 & 2007 highs and a median-line extending off the 2009 lows. The exchange rate could not register a weekly close below this mark and as of 12/20 the subsequent rally has marked the largest quarterly advance since Q3 1995 and the largest quarterly range (ATR) since Q4 of 2008. If this was just a zoom & retest of the 2014 breakout, the broader outlook would remain constructive while above this key threshold heading into 2017. Note that a parallel extending off the 2013 highs converges on the June high and highlights possible near-term support at 111.45."
• "The focus heading into Q1 is on a key resistance confluence at 120.18-121.12 where the 2016 open converges on the yearly high-week close, the 78.6% retracement of the 2015 decline, the upper median-line parallel of the embedded ascending structure and basic trendline resistance off the 2015 high. The current rally is at risk heading into this region and we’ll be looking for a pullback to offer favorable long-entries while above confluence support at 111.45."

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