What’s Next For the USDJPY?
Given recent events – probably more of the same. Even though the Japanese economy has suffered a downgrade and the country’s government released a new method of taking back control of the currency, more yen gains against the US dollar can be expected in the coming weeks.
Although some in the currency market are surprised by Moody’s decision to downgrade Japan’s credit rating to Aa3 on August 24th, most aren’t. Why? The recent decision by Moody’s is actually one that has already been passed by the other two global credit agencies. Standard and Poor’s Investors Services actually cut the nation’s rating back in January – and is still reviewing another potential cut. At the same time, Fitch Ratings has a similar rating for Japanese sovereign debt, also citing the economy’s negative outlook.
Especially since economic growth potential is extremely thin these days. With the high costs of rebuilding after the March tsunami disaster, the country’s government has also had to deal with the yen’s appreciation negatively affecting domestic exporters – a key driver of economic expansion. Both situations are likely to draw more attention from government officials bent on printing more yen to solve their problems. Japanese debt is now approaching a massive 250% of overall gross domestic product – a leader among industrial nations.
So, it shouldn’t be a surprise that the country’s debt rating would be downgraded by all three agencies. Although exponentially negative, both key bits of information have been known about the land of the rising sun for the longest time. It’s no wonder the USDJPY rate continues to trade below 77.00.
But, what about the new $100 billion dollar intervention effort?
Truth be told, this isn’t the first intervention effort and it won’t be the last. Currency traders know this – and that’s why it’s become ineffective. Granted, officials have changed things up a bit. Instead of direct spot market intervention or swap line use, the government will now make available $100 billion in cash for companies burdened by the higher yen – funds would be available through the JBIC or the state run Japan Bank for International Cooperation.
But, it’s not good enough. At this point, given the level of the USDJPY rate, a serious multilateral intervention effort may be required in order to weaken the currency pair to back above 80.00, for now. Anything less, and traders will continue to push the yen higher.
So, with the lack of conviction in both events, the next step for the USDJPY currency pair will be more appreciation. Now, I’m not saying it’s going to be without its pauses or potential turns. But, should the currency pair decline through 76.00, you can bet that buyers will be pushing for a 75.00 in a month’s time.