[B]US Dollar / Japanese Yen Monthly Technical Forecast[/B]
Long term, I continue to favor a decline in wave 5 that ends below the all-time low of 79.75. Coming under 93.50 would set the near term course down against 97.26. Until then, there is risk of a triangle forming as wave B (or X) of an A-B-C correction from 87.10. A terminal thrust above 101.50 would then take place in wave C (or Y) before resumption of the long term downtrend. Bottom line; a drop under 93.50 warrants a bearish breakout strategy against 97.26.
[B]US Dollar / Japanese Yen Interest Rate Forecast[/B]
US Dollar/Japanese Yen interest rate forecasts continue to remain stable as both remain near zero and with both economies still mired in a recession there is little expectation that there will be any change soon. The USD/JPY has traditionally seen price action dictated by risk sentiment but that relationship has been somewhat skewed as extreme bouts of risk appetite has led to broad based dollar weakness which has driven the pair lower. However, the re-emergence of the carry trade has started to lend support for the pair.
The BoJ raised its assessment of the economy for the first time in nearly three years which has pushed the Credit Suisse overnight index swaps interest rate expectations to 6 from 2. The BoJ in a statement said that “the pace of deterioration in economic conditions is likely to moderate gradually.” However, interest rates in Japan are traditionally the lowest in the world in order to drive demand for its exports which will continue to make it the funding currency of choice. Therefore, as equity markets and commodity prices continue to rise the yen should continue to see pressure even against the dollar.
[B]US Dollar / Japanese Yen Valuation Forecast[/B]
[B]USDJPY Valuation Forecast: Neutral[/B]
The Japanese Yen is effectively at its “fair” value against the US Dollar for the third consecutive month. However, both the yield outlook and comparative economic growth expectations are biased in favor of the greenback. Indeed, the States are forecast to outpace Japan’s performance both this year and in 2010. This suggests a broadly bullish bias for USDJPY in the months ahead. On balance, current positioning does not offer an attractive mispricing to be exploited from a valuation standpoint; it seems prudent to remain flat for the time being until a cleaner disparity presents itself.
[B]What is Purchasing Power Parity?[/B]
One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.