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FOREX Watch: USD/JPY races to the bottom

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FOREX Watch: USD/JPY races to the bottom

The USDJPY declined more than 2.5 percent this week, as investors looked to the yen to safeguard against Japanese stock market volatility. The yen’s broadening strength comes at the expense of Japanese equities. The benchmark NIKKEI declined almost five percent this week as investors cut their ties to risky Japanese equities. The pair fell below the 97.00 line Wednesday and never recovered, closing Friday in the neighbourhood of 96.30.

The trend index shows a slightly bearish outlook for USD/JPY, with support found in the vicinity of 95.75/51. Upside is capped at 96.61/85. Concerns over an oversold situation emerged early in the week, but have since diminished, as the markets weigh the impact of a potential US Federal Reserve bond taper in the fall. Although the Fed’s paring of its monthly asset purchases would support the greenback on the back of higher interest rates, a reduction (and eventual elimination) of quantitative easing will lead to less liquidity in the Japanese stock market. This has the potential to create even broader support for the yen at the expense of the NIKKEI.

The yen was also supported by the Bank of Japan, which opted to leave its benchmark rate unchanged Thursday. The BoJ upped its outlook on inflation on the heels of positive inflation reports, which diminished concerns the Japanese economy would need further stimulus measures to escape its decades-long struggle with deflation.

In other trading, the USDCAD was down on growing optimism in global recovery, this time led by improving fundamentals in Germany and China. The USDCAD hit a session low of 1.0276 in New York before consolidating at 1.0293. The Canadian dollar struggled this week on the heels of weak employment and housing data. These trends reversed slightly Friday when China produced stronger-than-expected data on industrial production. As one of Canada’s most vital trade partners, China’s growth prospects are intricately tied to the Canadian dollar, as well as other commodity-driven currencies.

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