Guest Post: Japanese Yen – 3 Strengths and 3 Weaknesses
By Yohay Elam - ForexCrunch.com
This is a guest post from Yohay Elam of ForexCrunch.com
The Japanese yen is falling for many months. After USD/JPY broke an important resistance, it dropped back to the critical line. Here are 3 forces that weigh on the yen and 3 forces that can push it higher.
Background: After reaching a swing bottom of 84.81 in November, the Japanese yen has been losing ground. At the beginning of January USD/JPY reached the peak of 93.77, also a support line in the past. This proved as a strong resistance line and the pair fell down to 88 before making the recent move.
This recent move sent the pair about 100 pips above this line, but it fell back to the same critical spot – 93,77. What’s next for the yen?
Reasons for Japanese yen strength:
- Global fear: The ongoing Greek crisis, that dominates EUR/USD trading helps the yen – the safe-haven, less-risky currency. Risk aversive trading is good for the dollar and better for the yen.
- Corrective moves: traders could send the pair back down as a correction after the new fiscal year began in Japan, readjusting positions.
- Chinese Yuan devaluation: The pressure from Washington could move Chinese policymakers to some devaluation of the Yuan. A stronger Yuan means less Chinese competition for Japanese goods, and this is positive for the yen.
Weights on the yen:
- Global recovery: the improving situation in the US, as seen in the recent Non-Farm Payrolls, is affecting the yen and was one of the reasons for its decline. More positive figures mean more USD/JPY strength and more carry trades that use the yen as a funding currency.
- Japanese economy weakness: The recent Tankan index showed that the situation in Japan is improving, but the index was still negative. Japan doesn’t enjoy a positive attitude from investors.
- Stimulus moves: The Japanese government prefers a weaker yen for its export-oriented economy. While an intervention looks quite unlikely, the words of senior Japanese officials could keep the currency weak.
Another note: As aforementioned, the yen is a funding currency for carry trades. GBP/JPY, AUD/JPY and even NZD/JPY are rather popular among crosses. Further Japanese weakness will probably be felt in a stronger manner in AUD/JPY than in other pairs, as the interest rate gap is the widest there. GBP/JPY is more tricky due to Britain’s own problems.
April 8th, 2010
