Fundamental Forecast for Japanese Yen: Neutral
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The USDJPY looks poised for a larger pullback as it fails to maintain the bullish trend from back in October, and the pair may ultimately probe below the 102.00 handle as the dismal Non-Farm Payrolls report dampens the outlook for the dollar.
Indeed, a more pronounced slowdown in the U.S. recovery may prompt a further delay in the Federal Open Market Committee’s (FOMC) exit strategy, and the fundamental developments coming out of the world’s largest economy may continue to drive the exchange rate lower as a growing number of central bank officials show a greater concern for disinflation.
However, the widening trade deficit in Japan may limit the downside risk for the USDJPY as it dampens the prospects for an export-led recovery, and the Bank of Japan (BoJ) may come under increased pressure to further embark on its easing cycle as the weakening outlook for growth undermines Governor Haruhiko Kuroda’s pledge to achieve the 2% target for inflation by 2015. In turn, BoJ board member Sayuri Shirai, one of the three dissenters at the December 19 meeting, recently argued that ‘additional monetary easing measures should be taken without hesitation so as not to jeopardize the BoJ’s credibility,’ and we may see a growing rift within the central bank as the region faces a slowing recovery.
With that said, we will retain a long-term bullish bias on the USDJPY amid the deviation in the policy outlook, and the near-term correction may ultimately generate a higher low in the exchange rate as it carves a higher high coming into 2014. As a result, the December low (101.61) may come back into play as we look for a higher low, and will look to ‘buy dips’ once the correction is over as it preserves the upward trend carried over from 2013. -DS