Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
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The next round of JPY devaluations will be more challenging

Recently USD/JPY decisively cleared an important consolidation pattern and could reach 130 and possibly beyond with not much sign of any let-up in the Bank of Japan's massive monetary stimulus programme.

In recent months JPY has been giving ground to GBP, EUR and of course the USD, which in two years has risen from 95 to around 125 – an astonishingly fast appreciation in terms of movements in major currencies.

The next round of JPY devaluations will be more challenging

With key resistance at around 122 cleared, USD/JPY look set to challenge the next key resistance level of 130, possibly even eventually reaching 150. Though the pace of the USD rally has stuttered recently – the big difference is that Japan is still carrying out quantitative easing whilst the US has stopped and is even contemplating interest rate rises.

This alone justifies continued weakness for JPY, despite remarks from BoJ governor Haruhiko Kuroda that JPY is already very weak and that USD was not bound to rise further against the Japanese currency. In the end fundamentals will reassert themselves.

 

USD/JPY – not so smooth from now on

 

USD/JPY – not so smooth from now on

However, the chances of another smooth depreciation of a similar magnitude over the next two years seems unlikely – if for no other reason than geopolitical ones (this might be a factor in Kuroda's recent remarks).

Debasing JPY is creating considerable tensions with Japan's neighbours and risks igniting trade wars. For instance it could endanger the signing of the Trans-Pacific Partnership, a major trade deal, which could help US and Asian economies to grow faster.

However, even the US, which has gone along with the Japan's devaluation policies in the hope that its Asian ally's economy will recover, may soon start losing patience. Partly due to a strong USD, the US economy has started to slow down as US exports lose competitiveness.

Concerns have been voiced out of Washington that Japan may have become over-reliant on currency devaluations, rather than reforming its economy to make it more flexible and productive. The US tends to be sensitive about countries pursuing devaluation policies, think China in recent years.

This suggests that JPYs downward path going forward might become more rocky. If the US comes out strongly against it, Japan might be forced to start reigning in its massive QE programme. A push towards 150 could be enough to raise tensions with Washington particularly if the US economy is only growing at a lacklustre pace.

 

By Justin Pugsley, Markets Analyst MahiFX

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