In the Japanese Yen Outlook: USD/JPY and EUR/JPY Key Levels to Watch for Today’s Forex Trading Activity, author Peter Keohane examines recent market activity as well as the historical trends that may help investors make better trading decisions. The author notes, “The Yen is a key currency to watch” due to its historical strength in relation to its exchange rate with the U.S. Dollar. He also points out the recent sharp decline in the Euro against the U.S. Dollar, which he says could be a major indicator of a major shift in European interest rates.
While it’s true that the Japanese Yen has been strengthening against the U.S. Dollar recently, many experts are still holding out hope that an unexpected economic downfall in the Eurozone will eventually force the European Central Bank (ECB) to reverse course and re-establish the strength of its currency peg with the U.S. Dollar. As Peter Keohane explains in his book, if this happens it would be very difficult to reverse back once the “debt crisis” has subsided. Of course the only way this will happen is if the European Central Bank (ECB) decides to cut off the liquidity support the ESM provides to the Eurozone.
Peter Keohane then goes on to highlight what he calls the “Doha Dilemma” as a possible indicator that the Eurozone may be on the verge of failing. As I’ve written about before, it’s easy to forget that the ESM was supposed to be a bailout for the Eurozone. At the same time, the European Central Bank (ECB) had to resort to an unorthodox type of intervention to save the Eurozone from economic collapse. Peter Keohane points out the fact, “The failure to solve the Doha dilemma means that the credibility of the ESM will be questioned and it could be forced out of operation at some point in the future.”
In addition, Peter Keohane points out that a possible failure of the Eurozone could open the door to renewed financial instability in Europe and lead to a “depression of sorts”. He goes on to say that “the Japanese Yen Outlook: USD/JPY Key Levels to Watch For Today” highlights “an economic environment where a number of global markets could experience a major disruption and a number of indicators could break even or weaken in relation to the U.S. Dollar” including the EUR/USD, the JPY/JPY and the GBP/USD. while the Swiss Franc remains strong.
However, despite the uncertainty surrounding the events in Cyprus and Greece, the author still sees the “Doha Dilemma” as a potential indicator of recovery and as the Cyprus and Greece experience the first major decline since the outbreak of the global economic crisis in 2008. The author states, “We’re in uncharted territory” as far as regards the Cyprus and Greece’s ability to return to growth and stabilize their economy.
Finally, the Japanese Yen Outlook: USD/JPY Key Levels to Watch For Today also makes some interesting points regarding the recent rise in the U.S. Dollar and what Peter Keohane calls the “U.S. Dollar Recovery Story” where the U.S. Dollar continues to rise due to the positive impact of President Obama’s “Recovery Agenda” and stimulus packages. “This may indicate the beginning of a stronger recovery in the U.S. Dollar,” states the author.
While I’d disagree with the premise, “A strong recovery is imminent”, this analysis does not discount the fact that the euro and the U.S. Dollar both have been falling against the Euro during the past few months. Indeed, the dollar has actually strengthened in relation to the Euro, indicating that the U.S. Dollar may be “testing” its historic lows against the Euro against the Japanese Yen.
Ultimately, the author concludes his “Japanese Yen Outlook: US Dollar Forecast” with the following observations: “Based on the data thus far, we would expect a weak recovery in the USD/JPY from now until early 2013.” This is a very bullish article and gives a strong signal of continued strong U.S. Dollar buying power over time.