Yen Surges To 15-Month Highs: Japanese Inflation As A Pivotal Driver

Fundamental Forecast for JPY: Bullish

Talking Points:

The Japanese Yen put in a pronounced move of strength this week as the currency crafted a fresh 15-month high against the US Dollar. Price action in USD/JPY drove lower Monday through Thursday, finally running into a bit of technical support on Friday morning. This bearish move broke through the support-side of a range that’s been in place for more than nine months; and making matters more interesting is the fact that of these fireworks happened with a backdrop of seemingly ‘good’ news.

BoJ Governor Haruhiko Kuroda was re-appointed for a second five-year term atop the bank. While this was largely expected throughout the week, the formal announcement on Friday morning comes in around the same time as that support bounce; but given dynamics across the FX market, it would appear as though the Friday pullback is more related to an oversold US Dollar seeing a bit of short-cover ahead of a long holiday weekend in the United States.

USD/JPY WEEKLY CHART: PLUNGE TO WEDGE, TREND-LINE SUPPORT

Chart prepared by James Stanley

Governor Kuroda was the architect of the Bank of Japan’s massive stimulus program, coming into play with the election of PM Shinzo Abe in Q4, 2012. Since then, the Japanese economy has added a significant amount of liquidity as the search for 2% inflation continues. With Japan continuing to see inflation levels below one-percent, and even below .5% for the first half of last year – this kept the Yen as a favored currency for strategies of weakness, allowing for outsized bullish moves to develop in pairs like EUR/JPY and GBP/JPY.

More recently, that weakness has started to come into question as investors around the world speculate when the BoJ might actually begin to move away from those uber-dovish policy metrics. At this point, the BoJ has shown no signs of budging, but that hasn’t kept markets from staging a pattern of Yen-strength as inflation has started to creep-higher last month. Inflation came-in at an annualized one-percent in December. This is a 33-month high, and since we’ve had that print, matters of Yen-weakness haven’t really been the same.