Weekly Forecast - USDJPY

- The major economic data that was out for Japan this week had been the '08 Q4 GDP which came in -12.7% (per annum basis), representing the worse decline since the '74 oil crisis.

- This week, we have seen broad USD strength as risk aversion came back into the market.

- And for the USDJPY, it had been a defining week too. The high was hit on Thur NY trade at 94.47. JPY is no longer the safe currency of choice. USD seems to be the only 'good' ccy left (by virtue of a lack of options).

- One interesting thing I have noted is that the stock correlation between USDJPY and stocks (Dow) have broken off. Traditionally, as stocks fell, the USDJPY would fall as well as investors flee to buy the safe haven ccy JPY. I ran a correlation test for the two from the first trading day of this year to 19 Feb '09 and found that the correlation is 0.026.

This is by no means a comprehensive statistical result as I have used a small sample size but a similar 1 year correlation test returned more than 0.8. The huge difference between the two results should tell you something as an indication.

- Furthermore, we're seeing more Japanese investors ditching Japanese stocks and bonds for foreign assets. Just last week (ending 13 Jan 09) there had been an outflow of JPY1.8 trn. This is USDJPY supportive as investors need to sell JPY to buy foreign currencies to purchase foreign assets.

And as long as local assets show no promise of returns, money will flow out of the country. Remember Japan is facing a serious deflationary scenario.

- On technical analysis, the USDJPY now trades at the critical neckline level (appr 93.75) of a double bottom reversal (see chart). A clear break of this level would mean further upside.



In my previous post I've highlighted a resistance line that goes all the way back from Q3 '07. Extrapolated to today, it is indeed very relevant in resisting upward moves. Notice that the price is resisted by the line in early Q4 '08 (see chart).

Because of this week's huge surge, USDJPY is currently trading above the current resistance of 92.7 (93.75 at the point of writing). We should see a close above this line of 92.7 today at NY close.

Next week Friday’s closing will be critical to judge if usdjpy is going to break over clearly and go for the home run of 98 but that's another story altogether. Watch this space.

With that, my call for week ending 27 Feb 09 is

Buy from 92.40 (which is the resistance line extrapolated to next week)

Sell near 97 (congestion area of late nov 08)