Japanese Yen Room to Rally as BoJ Witholds Stimulus Details

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Japanese Yen Room to Rally as BoJ Withholds Stimulus Details

Japanese Yen Fundamental Forecast: Bullish

The Japanese Yen was a top performer this past week, losing only -0.08% to the top British Pound, while adding at least +0.52% against six of the major currencies, even posting gains greater than or equal to +1.48% against four of the major currencies DailyFX Research covers. The USDJPY dropped by -1.48% to close at ¥98.05, but not before seeing 99.90 to the upside and 97.56 to the downside. The Yen’s strength was most pronounced on Thursday and Friday, when speculation arose that the Bank of Japan wouldn’t embark on any new easing policies, after having significantly expanded the scope of its easing measures at the prior meeting.

The speculation was confirmed on Friday, when the BoJ painted broad strokes with its dovish policy intentions, really only going as far as indicating that it would continue to expand its monetary base until it achieved its desired inflation target of +2.0% y/y by 2015 or 2016. The reaffirmation without policy action is a bit surprising, as is the roundly upbeat attitude, given the National Consumer Price Index (MAR) report released on Friday: deflation accelerated to -0.9% y/y from -0.7% y/y, below the consensus forecast of -0.8%, according to a Bloomberg News survey. Nevertheless, BoJ Governor Haruhiko Kuroda insisted at his post-meeting press conference that “various indicators are showing signs that inflation expectations are heightening as a trend,” though he did clarify that a rebound in inflation would need to be “self-fulfilling,” to an extent.

In the near-term, for now at least, it seems that Governor Kuroda is satisfied with the measures set for thus far, and accordingly, won’t bring about any new policies that would inevitably introduce another hurdle for the Yen. With these sentiment in place as the backdrop, the Japanese Yen rightfully rejected an exchange rate of 100.00 versus the US Dollar, in what was the second of two failed attempts to crack the elusive figure in April.

Exogenously, there are several factors that make the Yen an appealing near-term candidate for gains in the week ahead. In Europe, leaders are backpedaling away from austerity, and now there are rumors afoot that the European Central Bank will either cut rates by 25-basis points this week or introduce non-standard easing measures. Needless to say, the EURJPY is poised for major pullback should new dovish policies arise; it would also be a blow to the ECB, which has stubbornly kept rates high the past several months despite increasingly negative economic data from countries closer and closer to the core.

The Yen also could be poised to gain further versus the US Dollar, now that the US 1Q’13 GDP report disappointed investors. The severity of the decline in USDJPY this coming week largely depends on the Federal Open Market Committee policy meeting on Wednesday: a continuation of the recent shift towards hawkish commentary could stunt Yen gains; while a cautious step backwards towards the dovish side could help the USDJPY make a run back into the mid-90.00s (we favor the former).

Lastly, it is worth noting the strong relationship that the Yen has had with US equity markets – the Yen is essentially the leverage by which investors are stockpiling risky assets again. It’s very popular to be short the Yen, which means that positioning is heavily biased in one direction which could ultimately lead to a short covering rally. With US earnings not proving to match the enthusiasm of stock market bulls in the 1Q’13 and NYSE margin debt is approaching its all-time high set in July 2007, a pullback could be in order that would prove to be a positive catalyst for the Yen. In sum, despite the BoJ’s continued beratement, recent commentary and exogenous events make the Japanese Yen an appealing candidate for the coming week, and we thus hold a bullish bias. –CV

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