Forex Analysis: Economic Variables and USD/JPY Rate Analysis Report

This report provides a comprehensive analysis of the USD/JPY currency pair, focusing on the economic variables that influence its exchange rate. The report begins by outlining key economic factors, including inflation rates, terms of trade, political stability, current account, government debt, and interest rates, and explains their impact on foreign exchange rates. The analysis then delves into the specific relationship between the US dollar and the Japanese yen, exploring how factors such as export and import rates, and the Bank of Japan's interventions affect the currency pair. The report includes a chart illustrating the fluctuations in USD/JPY rates and offers a forecast based on current market scenarios, considering the US-China trade war and tariff implications. The analysis suggests a potential decrease in the USD/JPY rate in the coming months, and also highlights the role of inflation. The report concludes with a reference list of books, journals, and online resources used in the analysis.

Forex Analysis

Table of Contents
TASK ..............................................................................................................................................3
1. Economic variables which influence foreign exchange rates:.................................................3
2. USD/JPY:.................................................................................................................................4
2.1 Relation of Dollar-Yen:.........................................................................................................4
2.2 Analysis:................................................................................................................................5
REFERENCE...................................................................................................................................6
......................................................................................................................................................6

TASK
1. Economic variables which influence foreign exchange rates:
One of the most significant tools by which the comparative standard of financial
development of a nation is ascertained is foreign exchange rate (Forex). A nation's foreign
currency exchange-rate offers a door for its financial stabilization, that is why it is continually
being monitored and evaluated. Here are some economic factors which affects foreign
exchange rates, as described below:
1.1. Inflation Rates: Shift in market-inflation are causing variation in exchange rates of
foreign currency. A nation with less inflation than other will have an rise in valuation of currency.
Products and services rates rise at a faster pace, with small growth. A nation as inflation rate
constantly lower has an increasing monetary value, whereas a nation has high inflation usually
finds its currency devaluation and generally has high interest rates (Magud, Reinhart and
Vesperoni, 2014). During first 3 months of year 2018, Inflation rate of Japan has gradually rose,
due to weakening of U.S. dollar exchange-rate comparatively with yen. In March, the dollar-to-
yen outside money swapping scale reinforced. Simultaneously, Japan's swelling rate plunged,
tumbling to 1.1 percent year-on-year.
1.2. Terms of Trade: The conditions of trade are the proportion of export rates to cover
rates for the present reports and equilibrium of funds. Trade conditions in a country increase if
export rates increase more rapidly than their import rates. This outcome in greater incomes
which boost the requirement for currency of country and value of the currency. This leads to an
increment in exchange rate. The hypothesis of "uncovered interest parity" articulates that the
dollar-to-yen conversion scale ought to acclimate to dispose of the benefits emerging from loan
fee contrasts. Be that as it may, the remote trade part of a dollar-yen convey exchange includes
selling yen and purchasing dollars, which will in general discourage the yen's swapping scale
and reinforce the dollar.
1.3. Political Stability & Performance: A nation with a lower risk related to political
unrest is therefore more appealing to foreign capital investment, which will remove more
politically and economically stable investments from other nations. Increased foreign
investment, in effect, contributes to a surge in national currency valuation. There is no place for
confusion about the significance of their currencies in a nation with robust economic and
commercial policies. Political conditions are quite diverse in the U.S., even the political risk also
there as the USD/JPY currency pair has traditionally had a close correlation with U.S.
Treasuries that is the main factor that impact this currency system.

1.4. Country’s outstanding payments or Current Account: The equilibrium of
business as well as foreign direct investment income represents a nation's current account.
Total transaction volume includes imports, exports, debts and so on. The current account's
deficit triggers depreciation as a result of investing more of its currency on imports than it earns
by selling goods. Payment balance varies in its national currency's swap rate. For instance, if
Americans purchase cars from Japan, and have no different exchanges with Japan, the
Japanese must wind up holding dollars, which they may hold as bank stores in the United
States or in some different U.S. speculation. This will also impact the balance of payment
system.
1.5 Government Debt: It is also regarded as overall public debt or national debt. It is
less probable that a nation with government debt will obtain foreign or abroad capital, which
leads to inflation. If the industry predicts public borrowing in certain nation, foreign shareholders
will distribute their obligations on the accessible sector. This will lead to a reduction in the
currency valuation. The rationale of putting resources into this cash pair is that the U.S. could
never default on its bond commitments. At the point when Treasury bonds, notes, and bills rise,
USD/JPY costs debilitate.
1.6. Interest Rates: Fluctuations in rate of interest influences and impacts dollar-
exchange rate and currency's rate. All, interest rates, inflation and forex rates are closely
interlinked. Any appreciation in interest-rates leads to appreciation in nation's currency rate
because greater interest rates supplies higher rates to all lenders, that pull more abroad capital,
ultimately it leads to upward trend in exchange rates (Engel, Mark and West, 2015).
Considering above discussed factors following is an analysis of selected paid i.e.
USD/JPY of exchange-rates, as follows:
2. USD/JPY:
USD/JPY implies to forex ticker which symbolize $ (US-Dollar) and ¥ (Japanese-Yen)
rate exchange in international currency markets. It determines value of $ as against ¥, shows
that how much quantity of ¥ are required to buy $. The $/¥ unit is most widely traded pairs in
forex.
2.1 Relation of Dollar-Yen:
Dollar-Yen Rates generally fluctuates as per change in export and import rates.
Japanese export-dependent economies have a background of interference on monetary
economies, so that the cost of Japan's products in global economies can become increasingly
appealing. But Japan also relying upon exports of merchandise like crude oil.

The Bank of Japan is known to intervene in order to maintain payment prices high, so its
price increases can affect the USD / JPY price significantly. Japan's small figures of interest
rates rendered the Yen highly famous for transportation, so merchants often distribute the Yen
to purchase more returnable currencies. Yen has held its low value due to frequently sale.
2.2 Analysis:
2.2.1. Charts:
Here above graph represents fluctuations in USD/JPY rates. Currently 50 days average
movement in rate shows that currently 1 US $ equals 108.07 Japanese ¥. Such figure has
touched 124 level in 2015 where as it was below 100 earlier in year 2013 Currently exchange
rate of USD/JPY is 108.07. (USD/JPY, 2019).
2.2.2. Forecast:
An opinion has been raised as per analysis of current market scenario that due to US
and China trade war and Trump's Tariff such existing level of 108.07 ¥ will go down to approx
101.50 ¥ within one month. Thereafter in next two month this level will dropped to 100 ¥, than at
such level it will bring the attention from Bank of Japan. Overall forecast concludes that
USD/JPY will touch the the level of 100 USD/JPY within three month. However minor
improvement can be seen due to inflation factor.

REFERENCE
Books and Journals:
Magud, N.E., Reinhart, C.M. and Vesperoni, E.R., 2014. Capital inflows, exchange rate flexibility and
credit booms. Review of Development Economics, 18(3), pp.415-430.
Engel, C., Mark, N.C. and West, K.D., 2015. Factor model forecasts of exchange rates. Econometric
Reviews, 34(1-2), pp.32-55.
Online:
USD/JPY. 2019. [Online]. Available through:
<https://apac1.apps.cp.thomsonreuters.com/web/Explorer/EVzCORPxCHARTzEIKONCHART.a
spx?s=JPY%3D&st=RIC>