Which Currency Will Come Out on Top: US Dollar or Yen?

30 June, 2016

USDJPY currency pair is among the top five most popular pairs either in Forex market or when trading binary options, therefore not only governors of the central banks and managers of the hedge funds, but also millions of private traders around the world care for its future.

So what awaits the Japanese yen during the coming 12 - 18 months?

According to macro strategist of Goldman Sachs Group Kamakshya Trivedi, now it’s time to sell yen, because weakening of Japanese economy will likely push this currency to rather weak levels. Goldman predicts that yen will fall within the year to the level last seen in 2002, and mentions the figure of ¥130 per US dollar.

Deutshe Bank absolutely agrees with Goldman. DB reports that yen will outperform against virtually all currencies, except for the US dollar, with USDJPY reaching the peak around ¥130.

However, it should be noted that the forecasts of Goldman and Deutshe Bank for the Japanese currency appear to be probably one of the most bearish predictions. So, for instance, according to The Economy Forecast Agency, yen will reach the range of ‘just’” 107 – 109 yens per USD. As to the surveys, conducted by Bloomberg agency, they predict that the Japanese currency will on average weaken to the level of ¥118. The pair is expected to get to this mark by the end of March 2017. 

“We should keep in mind”, says the leading analyst of the broker company NordFX John Gordon, “that the key factor, supporting the status of this currency, was export. Demand for cars and household appliances, produced in Japan, provided a strong support for yen. However, slowdown in economic growth is obvious. And this slowdown continues even though the Bank of Japan had introduced a negative interest rate policy (NIRP).”

The hope, that such rates will support both producers and consumers, seemingly, failed to come true. Banks prefer buying stocks, rather than loaning their clients. And such a situation, according to the professor Ben Knight at Warwick Business School, is very dismal for the Japanese market.

However, there are optimistic outlooks for the future of Japanese currency.

A further fall of yen could be spurred by an increase of interest rates by the Federal Reserve. However, according to Laura Rosner, U.S. economist at BNP Paribas, nothing predicts, that such an increase can happen in 2016 or 2017 (Source: "Yellen Takes Control of Fed Message to Stress Gradual Approach," Bloomberg, March 29, 2016).

Experts of Barclays Bank agree to this scenario, they forecast a descending trend for USDJPY pair, which, in their view, should fall to the area of ¥95–100 by the end of the year.

“While Barclays Bank reckons that the pair will go down,” analyzes the situation John Gordon from NordFX, “experts from the Bank of America, on the contrary, believe that it had already reached its bottom, due to which the volumes of speculative trading are increasing.”

Certainly, there are still things which negatively affect yen. So, debt obligations of Japan are approximately 2.5 times greater than the annual gross domestic product (GDP) of this country, which is a major concern of not only the Japanese government, but also the International Monetary Fund. The IMF was even forced to issue an official warning on this subject (Source: CNNMoney, 7/24/2015). On the other hand, the most part of the national debt does not go beyond the domestic market, which slightly reduces urgency of the situation.

Another negative factor is aging of Japanese population. However, it is well known, that yen is one of the major reserve currencies, which reflects not only economic trends of the Japanese market, but also the markets of the countries of the whole Pacific region. It received the status of the world currency in 1953, and since then its rate had been considerably fluctuated: if in 1982 the exchange rate was ¥277 per 1 dollar, then 30 years later, in 2012, the exchange rate was only ¥75. Now it holds onto the mark of ¥106, but the future of the pair will be largely dependent not only on the actions of the Bank of Japan, but also on the state of other largest economies of the region. In a few months we'll see who will prove to be right – whether the experts of Goldman Sachs and Deutshe Bank, or Barclays Bank. "Though, once again," John Gordon from NordFX sums up, "the majority of analysts tend to predict the fall of the Japanese currency to the level of 118 yens per USD, or more.”

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