USD/JPY forecast for the week of December 17, 2012, Technical Analysis

The USD/JPY pair shot straight up during the week as the Yen weakness continues overall. There are elections in Japan over the weekend, and the opposition party is expected to take power. The opposition party is expected to pressure the Bank of Japan into expanding its already extensive quantitative easing practices, and as such drive the power of the Yen down.

What’s different about at this time is that there are even proposals of changing the law so that the Bank of Japan loses some of its independence. If that happens, expect the Japanese government to absolutely pommel the Yen going forward. The high value of the Yen has wreaked havoc on the export market in Japan, which is without a doubt one of the most important parts of their economy. With that being said, it is almost impossible for the country to come out of deflation without some kind of manipulation.

Looking at the technicals in this currency pair you can see that the 84 level was hit during this previous week. The market pulled back, and we even formed a shooting star for the Friday candle just underneath that 84 handle. However, looking at the totality and the longer-term charts, it seems that this pair is screaming to break out above and over the 84 barrier.

If we can break out above 84, this market should go much, much higher. That being the case, we can expect to see a drastic run-up in the value of this currency pair, as the Yen will be sold off drastically.

The key will be whether or not the LDP, or opposition party, takes control of the lower house in the Japanese parliament. If they managed to have 320 seats in the lower house that is enough in order for them to be able to bypass the upper house which should still be run by their political opponents. If they do in fact get 320 seats, this pair could absolutely skyrocket and find itself challenging such levels as 90, 95 and even 100 over the course of the next several months. Of course, the fiscal challenges in the United States could throw a monkey wrench in the entire situation, but right now it appears that the markets expect Congress to at least come up with a patchwork deal.