Japanese Yen Remains a Sell Until this Changes
Fundamental Forecast for yen:Bearish
- US dollar clears key resistance versus yen, further rallies likely
- Attention turns to ¥126.31 as the next potential level of resistance
The Japanese yen fell for the third-consecutive week and finished at decade-plus lows versus the US dollar as traders sold aggressively into JPY declines. Current price momentum leaves us in favor of continued USD/JPY gains, but any significant surprises out of upcoming revisions to Japanese GDP Growth figures or Produce Price Index inflation figures could force noteworthy short-term volatility.
Sharp yen declines suggest that traders are once again speculating that the Japanese currency will continue lower, and indeed recent CFTC Commitment of Traders data shows a dramatic increase in bearish bets on the JPY (bullish USD/JPY positions). Much of this renewed demand seems linked to the recent surge in global bond yields; a record surge in German bond yields sparked similar moves in US Treasury yields and other global benchmarks.
It was European Central Bank President Mario Draghi who perhaps unintentionally set global bonds into brief turmoil as he said “we should get used to periods of higher volatility [in asset prices].” In doing so, Draghi suggested that the ECB would not respond to the previous tumbles in German Bund prices and rise in yields. Yet it stands to reason that officials may show some concern following the unexpectedly sharp reactions from global markets, and it’s far from guaranteed that bond yields will continue higher under the watch of the European Central Bank and other counterparts. Whether or not the yen continues lower will likely depend on their next moves.
The USD/JPY moves in fits and starts—it is known to consolidate for months on end until ultimately breaking sharply in one direction. And indeed we recently argued that its recent break higher bears a clear resemblance to major rallies in the 2013 and 2014. On this alone we like trading it higher, but past performance is no guarantee of future results. It will be important to keep an eye on bond markets in the week ahead to judge the likelihood of continued yield-driven JPY declines. – DR.