I have compared Japanese trade balance data with the USD/JPY exchange rate to determine that the dollar could appreciate as much as eight cents in the next eight months.
USD/JPY exchange rate
Japanese exports and imports are both down, like the rest of the world.
Japanese trade balance (imports minus exports) turned signifcantly negative during December and January. This caused Japan to become a net importer during the worst of the global recession.
Trade numbers take a little while to work themselves into the exchange rate. I lagged the USD/JPY by 10 months and compared it to a 3 month average of Japanese trade balances. The results are depicted. The correlation is better than 83%.
Throughout 2008 and 2009, the correlation between USD/JPY exchange rates and Japanese trade balances has been positive.
Three month average trade balance is significant against the exchange rate at the 1% level. The regresion reveals the following equation.
USD/JPY = 109.126 + 0.00001498 * Trade Balance 3 Month Moving Average
Using this equation, excel calculated predicted what the USD/JPY exchange rate would be 10 months after the recorded trade balance.
The model explains 69% of the exchange rate movement so there are some errors to deal with. The residuals use USD/JPY exchange rates 10 months after the observed trade balance figure. They are calculated as Actual exchange rate - Predicted exchange rate. The results show that, as of July, the USD/JPY is the most undervalued iti has been since the begining of 2008.
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