Japanese Yen Forecast Uncertain on Financial Market Indecision

The Japanese Yen saw an incredible week of volatility against the US dollar and other major forex counterparts, as dramatic shifts in the US Dow Jones Industrials Average and other major risky asset classes led to similar movements in the East Asian currency. Early-week news that Lehman Brothers filed for bankruptcy sent the Yen significantly higher through Sunday’s open, but subsequent announcements from the Federal Reserve and other major central banks seemed to bring temporary calm to financial markets. If Friday’s price action is any indication, it seems that traders are once again willing to take on risks and short the Yen against higher-yielding counterparts. Of course, we have seen market risk appetite vary dramatically in the past week alone, and our Japanese Yen forecast is far from clear on broader indecision across all traded markets.

Our long-term Japanese Yen forecasts remain bullish, but the short term is far less clear. Key questions remain as to whether recently-announced US Federal Reserve and Treasury plans will be enough to bring a sustained calm to distressed credit markets. We see that safe-haven US Government bond yields have jumped substantially in a short two-day span, while equivalent money market rates have fallen. Such price action suggests that financial institutions are willing to leave the safety of Treasuries and seek higher short-term yields on the interbank lending market. If such trends continue, we could see the USDJPY rally further off of recent lows. Yet it serves to note that the US Dollar/Japanese Yen pair stopped abruptly at key technical resistance through Friday’s close—easing over 100 points before a smaller bounce. If the USDJPY is unable to test and break through the 61.8 percent Fibonacci retracement of 110.70-103.50 at 108.00, short-term risks remain clearly to the downside.  - DR