Japanese Yen Strength to Be Undermined by Slowing Inflation
Fundamental Forecast for Japanese Yen: Neutral
The Japanese Yen regained its footing against the dollar, with the USDJPY slipping back below the 98.00 handle, and the pair may continue to give back the rebound from earlier this month as it carves a lower high just below the 99.00 region.
With the U.S. government back online, key metrics coming out of the world’s largest economy is likely to spark increased volatility next week, but the shift in the policy outlook may continue to drive the exchange rate lower as we see a growing number of Fed officials scale back their willingness to taper the asset-purchase program. Indeed, it seems as though the Federal Open Market Committee (FOMC) will retain its highly accommodative policy stance throughout the remainder of the year in order to combat the fiscal drag, and the central bank may delay its exit strategy until the March 18-19 meeting as the temporary rise in the debt ceiling is set to expire on February 7.
At the same time, headlines surrounding Japanese Prime Minister Shinzo Abe’s ‘Third Arrow’ stimulus plan may continue to heighten the appeal of the Yen as it gives the Bank of Japan (BoJ) more room to retain its current policy, and the wait-and-see approach may produce further declines in the USDJPY as the shift in the policy outlook. However, Japan’s Consumer Price report may weigh on the Yen as the core rate of inflation is expected to narrow to an annualized 0.7% from 0.8% in August, and we may see BoJ Governor Haruhiko Kuroda come under increased pressure to further embark on the easing cycle if the data undermines the central bank’s pledge to achieve the 2% target for price growth by 2015.
Nevertheless, the technical outlook continues to instill a bearish forecast for the USDJPY as the Relative Strength Index maintains the downward trend dating back to May, and we may see fresh monthly lows going into the FOMC meeting on October 29-30 as market participants scale back bets of seeing the Fed taper the $85B asset-purchase program. - DS