How Far Can USD/JPY Fall?

The U.S. dollar fell to a 7 month low against the Japanese Yen this morning following another barrage of weak economic data. Consumer prices fell, foreign inflows decreased and the UMich consumer confidence survey dropped to the lowest level since August 2009. On, I talked incessantly in my daily report about how the data today was going to be weak and yesterday, I said USD/JPY was going to fall to at least 87. However now that it has broken below that point, the burning question on everyone’s minds is How Much Further Can it Fall?

My updated target is at least 85.00 – The currency pair’s 14 year low. When USD/JPY reaches that point, expect Bank of Japan officials to cry uncle and attempt to talk down the Yen (and up the dollar). That will most likely create some 2 way risk in USD/JPY and stem the currency’s slide. Yesterday, Shirakawa already warned that they are watching USD/JPY closely.

Enjoy the chart, enjoy the trade.

Impact of New Japanese Prime Minister on Yen

Japan announced a new Prime Minister this morning – Naoto Kan. Hopefully he will have better luck than his 4 predecessors who resigned with only a year or less in service.

Resignations by Prime Ministers can have a significant impact on the country’s currency because its performance reflects investor sentiment. Forex traders typically do not like change and when Hatoyama announced his resignation, USD/JPY rose from 90.95 to 92.35 as the Yen as plummeted against the U.S. dollar. To get a sense of how the Yen could trade going forward, it is worthwhile to look back at how the currency behaved before and after the resignations of previous Prime Ministers.

The following charts suggest that the recent gains in USD/JPY may be temporary because once the political uncertainty from the Prime Minister’s resignation subsides, USD/JPY usually resumes it slide. Hopefully the new Prime Minster, Naoto Kan can break the unlucky chain and hold onto the post for more than a year.

Taro Aso (click to expand)

Yasuo Fukuda (click to expand)

Shinzo Abe (click to expand)

USD/JPY: What is Behind the Sharp Rally

USD/JPY is on a tear this morning following the better than expected jobless claims report. I think traders are relieved that the deterioration in the labor market can officially be blamed on Mr. Frosty because jobless claims have reverted back to pre-snow storm levels. Although I am worried by the sharp rise in the number of people receiving extended and emergency unemployment benefits, that is clearly not what the market cares about right now.

USD/JPY is trading off U.S. rates (yields) and not stocks. The following chart shows the strong relationship between USD/JPY and the 10 Year U.S. Treasury yield. This relationship holds for shorter term yields as well like the 2 year bond yield

Forex Moves in Sept Could Set End of Year Tone

As we begin the second week of trading in September, it is also important for currency traders to know that the performance of the EUR/USD and USD/JPY this month could set the tone for trading for the rest of the year. The following tables compare the performance of the EUR/USD in September with the performance for the last 3 months of the year. For the EUR/USD, in 7 out of the last 10 years, the currency pair’s performance in September foreshadowed the performance in Q4. In USD/JPY, this pattern occurred in 8 out of the last 10 years.

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