After weeks of congestion and building up an ascending wedge, USDJPY finally marked its major break above 108.50 last week. However, the subsequent move above 110 after the initial break seemed relatively tame compared to the major’s dollar-based counterparts.
Carry Selling And Risk Aversion Holds USDJPY Back
Fundamental Outlook for Japanese Yen: Bearish
- Japanese Government Warns Economy May Be Heading For A Recession
- USDJPY Stands As The Holdout To A General Carry Trade Breakdown
- A Corrective Wave Stands In Front Of USDJPY’s Breakout
After weeks of congestion and building up an ascending wedge, USDJPY finally marked its major break above 108.50 last week. However, the subsequent move above 110 after the initial break seemed relatively tame compared to the major’s dollar-based counterparts. Where pairs like EURUSD and GBPUSD marked 200-300 point moves, the yen only gave up only around 75 points last Friday. Why such a significant difference? The answer to this question will likely plague the USDJPY for the next few weeks. While most traders were rightfully following the dollar’s massive rally last week, the market made another major fundamental shift: unwinding the carry trade. Concern about the health of the financial and credit markets is heating up as lending rates have deteriorated to levels that look strikingly similar to the aftermath of the subprime meltdown. Furthermore, the outlook for interest rate differentials will certainly compete with the potential for return on an increasingly risky income strategy (owing to the jump in volatility). The probabilities of a yen hike are non existent; but they chance of a cut is also approaching nil. In contrast, the high yielders (AUD, NZD, GBP and to an extent EUR) are burden with expected cuts due to expectations of a dramatic downturn in growth.
Speaking of growth, this week’s economic calendar promises to revive interest in the Japanese fundamentals. This currency is notorious for completely ignoring its own event risk; but this may not be the case with data due over the coming days; namely the second quarter GDP reading. What would already have attracted close scrutiny of its own, interest in the growth reading has been magnified ten fold thanks to the Government’s warning that there is a “high possibility the economy has entered a recession.” This is essentially the equivalent of a profit warning for the economy, but you can’t dampen this kind of risk with a mere heads up like you can in the corporate world… – JK
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