USD/JPY Fundamental Analysis January 16, 2012 Forecast

The U.S. Dollar was higher against the Japanese Yen on Friday. A reminder that the U.S. Dollar continues as the world’s reserve currency and the recent positive tone in US economic data suggests that the Fed’s may be easing away from introducing another round of quantitative easing.

USD/JPY was trading at 76.79, up 0.04% at the close of the Asian session.

With these downside pressures on the U.S. Dollar slowly abating, coupled with our expectation that the Euro-zone crisis will get worse before it gets better, expect the USD/JPY to strengthen with other crosses favoring Yen strength, in the periods ahead.

The Japanese Yen was the best performing major currency on the week against the U.S. Dollar, even though it depreciated by 0.21 percent against its safe haven comrade. The majority of the strength the Yen exhibited against the other majors came at the frontend of the week, when market participants were just starting to digest the results of the most recent Euro-zone summit that concluded last Friday. Funding concerns continue to drive markets these days, as liquidity conditions remains tight; coupled with seasonal end of year effects, recent U.S. Dollar strength might be a bit exacerbated but demands respect nonetheless.

Looking ahead, there are some key events on the docket to look for, despite the limited impact data and fundamental event risk has had on the Yen in recent months (the Yen ebbs and flows on funding needs and haven demand). The most important event of the week is the Bank of Japan rate decision, due out sometime near the close of Asian markets on Wednesday. The Yen’s recent strength remains a concern for the BOJ and Ministry of Finance – it is the best performing currency versus the U.S. Dollar this year – and there will likely be a statement made that officials are “watching the Yen closely.” Aside from that, markets are pricing in zero percent change of a rate move, and accordingly, only 2.0-basis points are priced into the Yen over the next 12-months.

The Yen will continue to move along with global risk-appetite trends; on good days for equity markets, the Yen will lose ground; on bad days for equity markets, the Yen will gain ground. Little in the way of news or economic data is expected from European and US markets and therefore the pair was likely to find support at 76.67, Thursday’s low, and resistance at 77.04, Wednesday’s high.

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