On account of the stronger Dollar fundamentals, the Yen lost ground against it over the course of 2018, although it registered significant gains in December, reducing the overall blow. Currently trading at 108.8, compared to 111.01 in the first week of 2018, the pair has an immediate Support level at 108.50, and a subsequent one at 104.87. The closest Resistance level stands at 111.43.
The Japanese economy appears to have left the perils of the past behind and is now growing at a moderate yet stable rhythm. Overall leading economic indicators are in the black, with both manufacturing and non-manufacturing outlooks being positive. The country keeps importing more, signifying that consumption is growing, while inflation, the utmost worry for the Japanese economy, appears to remain above zero, despite fluctuating on a m/m basis.
Furthermore, the unemployment rate continues to remain low, while retail trade keeps growing. BoJ policy is still accommodative, with no change in interest rates expected, at least until inflation manages to remain close to the target for a significant amount of time. No major political events are expected to take place in the country over 2019, thus Prime Minister Shinzo Abe will still maintain the majority in the House of Representatives, and Abenomics will continue boosting the Japanese economy.
In addition to the above, the Yen is considered to be a safe haven asset, with the currency appreciating during periods of market turbulence.
The events at the end of 2018 have provided more support to this view, as stock market turbulence strengthened the Yen and helped it recover the majority of its losses from throughout the year.
The Yen does not face any major risk factors, however, the negative interest rate differential with respect to the Dollar should have at least some impact, given that the carry trade should have a depreciative effect on the Japanese currency. Other than that, the Yen’s main risk driver is the performance of the Japanese economy, which has been prone to major ups and downs over the past decade.
Overall, despite the recent strengthening of the Yen, it is expected that the Japanese economy will continue to grow, and if at least one rate hike takes place in the US then the Yen should weaken against the Dollar. Nonetheless, if the
strength in the Japanese economy persists then it could potentially reverse the effect from the interest rate differential.
Outlook for USDJPY
– Technically Bearish
– Pivot Point – 111.25
– Support – 108.00, 106.40 and 103.15
– Resistance – 113.00, 116.20 and 117.80
JPY and USD/JPY Review
– Carry trade should provide downwards pressure.
– Economic outlook better than last year but still fragile.
– Interest rates are expected to remain negative, at least until inflation is consistently close to the target.
– Abenomics pertaining to the fiscal support of monetary accommodation are also expected to continue.