Japanese Yen To Appreciate Further As BoJ Maintains Current Policy

By David Song, Currency Analyst

Fundamental Forecast for Japanese Yen: Bullish

The Japanese Yen continued to appreciate against its U.S. counterparts as positive real interest rates in Japan increases the appeal of the low-yielding currency, and we may see the USDJPY track lower in the week ahead should the Bank of Japan preserve its current policy in July. Indeed, the BoJ is widely expected to uphold its zero interest rate policy, and there’s speculation that the central bank will continue to carry out its current asset purchase program as the board raises its outlook for the region.

Indeed, the BoJ raise its fundamental assessment of all the nine regions for the first time since October 2009 while presenting the quarterly Sakura Report and it seems as though the central bank will stick to its wait-and-see approach as economic activity starts picking up. Although Governor Masaaki Shirakawa maintained his pledge to purse ‘powerful monetary easing,’ it seems as though the central bank is becoming more upbeat towards the economy as the recent developments coming out of the world’s third-largest economy raises the prospects for future growth. Meanwhile, the Nikkei newspaper said that the BoJ may scale back on its 6-month operation and expand its shorter-term programs, but the central bank may see scope to inject additional liquidity into the system as the ongoing turmoil in Europe dampens the outlook for the world economy. BoJ Deputy Governor Hirohide Yamaguchi held a cautious tone while speaking in Tokyo earlier this week and said that excessive gains in the local currency would dampen private sector activity, and we may see the central bank try to talk down the Yen as it lowers the scope for an export-led recovery.

As the USDJPY threatens the ascending channel carried over from June, a close below the 20-Day SMA (79.56) would instill a bearish outlook for the pair, and the dollar-yen may continue to give back the rebound from 77.65 as the relative strength index fails to maintain the upward trend from the previous month. However, we may see the dollar-yen face sideways price action ahead of the rate decision as market participants weigh the outlook for monetary policy, and the outcome of the rate decision should generate a clearer picture for the USDJPY amid the mixed views surrounding the BoJ. - DS
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