The USD/JPY currency pair has been on a steady downtrend for over a year now, and with the potential for QE3 still present, dollar weakness and yen strength looks likely to persist.
The world of currency trading has been extremely volatile so far this year because of all the financial crises major economies have been experiencing. So if you asked me what currency has been performing well, two answers come to mind. One is the Swiss franc (CHF) and the other is the Japanese yen (JPY). In this article, I’ll talk about the latter.
Gone are the days when investors worldwide consider the US dollar (USD) as a pure “safe haven.” In some degree, it still is, but this moniker has obviously been taken away by the likes of the swissie and the yen.
What ultimately led to this was the fact that the US economy has not been showing any signs of improvement at all after bouncing a bit from the deep recession that it recently had. If you remember, the US Federal Reserve already signed off on two quantitative easing programs to spur liquidity and to jumpstart business activity, but to no avail.
Fast forward to 2011, the US, which was facing a record load of sovereign debt, was forced to increase its debt ceiling just to avoid a default. In doing so, however, did not take away the fact that overall economic activity is still slumping.
Given this and the new threat that the country would once again fall into a recession leaves the Fed, at least from their end, no choice but to consider a round three of quantitative easing (QE3).
Well, as you know, doing so would devalue the USD because of the increased money supply. Naturally, the USD would then weaken against the other major currencies. Foreseeing this, investors would avoid and even dump the buck, which could cause the currency depreciation to be even faster.
Aside from the swissie, the Japanese yen appears to be where the money is flowing. As you can see from its chart below, the USD/JPY currency pair has been on a major downtrend for more than a year. This means that the yen has been kicking the USD’s behind for a long time now.
Click to Enlarge
Well, the JPY has recently marked a new all-time high against the USD (all-time low for the dollar and for the pair) at 75.95 on August 19, 2011. The pair, though, looks to be pausing for a while.
In my opinion, it could temporarily rally back to its former low at around 80.00 to 80.50. Given its present downtrend, though, the USD/JPY pair would more likely fall unless the downtrend line gets broken and the pair shows a sign of reversal. Until that time, expect the pair to resume its trek south over the longer term.
By Al Sevilla of LaidTrades.com
