The Japanese yen was the worst-performing G10 currency through the past week’s trade, as a clear (if temporary) improvement in financial risk appetite led the currency substantially lower against higher-yielding counterparts.
Japanese Yen Could Rise Amid Technical Corrections
Fundamental Outlook for Japanese Yen: Bullish
- Japan’s jobless rate hit 2-year high, household spending down for 11th straight month
- Bank of Japan’s Tankan index plunged to the lowest level since recordkeeping began in 1974
- G-20 summit offers few surprises, takes no stance on currencies
The Japanese yen was the worst-performing G10 currency through the past week’s trade, as a clear (if temporary) improvement in financial risk appetite led the currency substantially lower against higher-yielding counterparts. However, any sort of turn in the latest resurgence in risk appetite has the potential to drive “risky” assets lower, and the Japanese yen – along with the US dollar - continues to be a prime recipient of such fear-related money flows. JPY price action in the week ahead will subsequently depend on the trajectory of the US S&P 500 and other key risk barometers. That being said, predicting short-term price action in extraordinarily volatile assets remains nearly impossible. We would otherwise look to key economic event risk out of any given economy to dictate price action in the domestic currency, but FX traders have proven almost completely indifferent to Japanese economic fundamentals. As a result, it may be best to defer to broader price and risk trends as far as the Japanese yen is concerned, but given the sharp declines that the currency has experienced over the past month, the yen may be vulnerable to a technical corrections higher.
That said, it’s always good to keep tabs on the health of the Japanese economy, which remains dour. This week, the leading economic index is forecasted to slump further, reflecting nearly non-existent domestic demand and pessimistic investor confidence. Meanwhile, the Bank of Japan is widely anticipated to leave rates unchanged at 0.10 percent this week, as they will likely do throughout 2009. The thing to watch here is the potential impact that the bank’s meeting minutes could have on risk appetite, as indications that BOJ officials have judged that the current economic situation is deteriorating more rapidly than previously anticipated could weigh on the Nikkei, but lift the Japanese yen purely as a result of flight-to-safety.
