Cyclical lows in USD/JPY

Although it has already dropped substantially in recent months, the U.S. dollar/Japanese yen pair (USD/JPY) is set to remain under pressure throughout 2009 as global equities struggle to stage a credible recovery and major central banks hold off on raising interest rates.

Broadening yen strength combined with faltering fundamentals in the U.S. currency are likely to drag the USD/JPY under the 79 mark, a level not seen since both currencies began floating freely in 1973. Historical tendencies in the pair are poised to reassert themselves, driven by several market factors.

Last year was the year of low-yielders in the forex market. The Japanese yen and Swiss franc (CHF) topped the list of best performing currencies, underscoring the damage in equity and credit markets and the resulting flight to safety. The yen posted its strongest year since 1999 and was the only currency to have appreciated relative to the price of gold (+10 percent), compared with the franc (-3 percent) and the greenback (-8 percent). Unlike currencies, which are partly influenced by central bank price-setting mechanisms (i.e., interest rates), gold is largely considered to be determined by the forces of supply and demand, offering a more independent view of the currencies against which it is measured.

Like 2008, 1999 was a year of tumultuous volatility in emerging markets and slumping commodities, and it is no coincidence the lower-yielding currencies of Japan and Switzerland were the top-performing currencies that year, as well.