The dollar is getting crushed in the last few weeks against the yen, dropping over 600 pips since the end of July. The question is will there be a recovery back to the previous trading ranges of 105-110, or a further decline into the double digits—a level that hasn’t really been seen since 2013?
The answer to this question lies mostly on how traders will react to Janet Yellen’s speech on Friday at Jackson Hole and what message she will try to convey about additional interest rate increases by the end of the year.
A few months ago, right after “Brexit”, it seemed apparent that the Fed would delay any hikes at least until 2017. However, the resilience shown by the world markets and the domestic reports from the United States have completely shifted this notion, and right now it seems extremely likely that at least one more increase of 25 basis points will be made by the end of the year.
While December is the most likely timeframe, we can’t rule out a surprise in September if the markets continue to rally and we get another strong employment report on the 2nd of September.
Based on the recent comments by a few FOMC voting members, it looks extremely likely indeed that Yellen will use this opportunity to prepare the market for upcoming action by giving a more hawkish speech then the market is pricing in currently.
Right now it looks like the upside on the USD/JPY is far greater than the downside as the pair has remained supported at around the 100 level, and it would take an extremely dovish speech by Yellen for it to drop any lower, and as long as she leaves a December rate hike on the table this will not happen.
We also must remember that there is a second side to this equation—the Bank of Japan, which is monitoring the exchange rate very closely and will be willing to intervene in order to protect their interests.
In conclusion, I recommend a BUY right now with an immediate target of 103 by the beginning of next week.
