Monthly Forecasts for USD/JPY on July 2009

Interest rate traders forecast that the US Dollar yield advantage over the Japanese Yen will pick up significantly in the coming 12 months, but recently apathetic FX speculators have shown little interest in interest rate developments. The US Dollar/Japanese Yen exchange rate has instead moved off of shifts in global financial risk sentiment—especially as seen through key risk barometers such as the S&P 500 and Nikkei 225 indices. We predict this will continue to be the case through the foreseeable future.

Recent flare-ups in market tensions bodes poorly for the USDJPY pair; further equity market declines could fuel Japanese Yen appreciation. Further deterioration in risk sentiment could bring USDJPY losses, and it will be important to keep track of relevant indicators. Interest rate expectations, by comparison, are unlikely to influence FX market direction.

US Dollar / Japanese Yen Valuation Forecast

The Japanese Yen is effectively at its “fair” value against the US Dollar for the fourth 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, though any downward reversal in risky assets could stand to benefit the Yen as traders flock to the stand-by safe haven currency. 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.