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Fundamental Forecast for JPY: Neutral
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USD/JPY Technical Analysis: Sitting Heavy on Multi-Year Support
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The Japanese Yen has been quite the volatile currency of recent. After the Brexit referendum drove the Yen to fresh highs as risk aversion permeated through global markets, a two-week bout of weakness in the currency threatened to pose a longer-term reversal on the prospect of an even more enhanced stimulus package coming out of the Bank of Japan. But when the BoJ disappointed in July, and later when the Japanese Government Budget indicated far less fiscal stimulus than originally hoped, those bets of Yen-weakness priced out of the market aggressively, driving the Yen towards the highs established in the Post-Brexit environment.
To be sure, there is one key driver here for Japanese Markets: Anticipation of stimulus. Sure, data points matter, but primarily in how they might motivate policy makers to mold future stimulus efforts. And after the BoJ failed to deliver the ‘comprehensive, bold’ package in July that many were looking for, interest and attention began to steer towards the bank’s next meeting in September. As we mentioned in the trading forecast last month, just two weeks ahead of that most recent BoJ decision, September may be more optimal to get that next BoJ announcement of increased stimulus. From our Yen forecast on July 15th:
However, stimulus is likely coming and it’s just a matter of time and a matter of how it’s going to be done, whether it’s helicopter money or just more QQE (Quantitative and Qualitative Easing). And while September might be a more likely period to get such an announcement from the Bank of Japan rather than the Central Bank meeting in two weeks, we will likely see markets continuing to price-in this probability of more economic stimulus throughout the week ahead.
And while we did get that continuation of a pricing-in of increased stimulus heading into the July meeting, much of that has been erased in the first half of August after the BoJ underwhelmed. But, is the Bank of Japan done? This is the same bank that’s embarked on some extremely experimental policy efforts already in the goal of fighting deflation; like buying stocks with QE in 2014 (which hasn’t worked out well at all) and then making the surprising move to negative rates earlier in the year. So the BoJ is comfortable taking on risks in economic policy as they’ve exhibited in the past, and this has many expecting the eventual delivery of ‘helicopter money.’ And while there are still some quandaries around the execution of such a policy, including whether or not ‘helicopter money’ would even be legal under current Japanese structure, what is clear is that the bank has not yet shown any signs of letting up on the stimulus front.