Fundamental Forecast for Japanese Yen: Neutral
- EURJPY plunges from weekly high as Euro slumps on ECB rate cut speculation.
- The USDJPY rallied after the Fed announced QE3 would remain in place through at least December.
- Monitor intraday momentum in the JPY-crosses using the StrongWeak app.
The Japanese Yen continued to trade broadly sideways through the last week of October as the continued streak of depressed volatility has stirred little interest in the low yielding funding currency. The Yen’s diminished appeal can in part be attributed to the Federal Reserve’s decision to hold QE3 in place at $85B/month: in September, the ‘non-taper’ sent the Yen higher only against the US Dollar; yet no such bullish reaction was seen by the Yen this week.
If anything, the reaction seen in the JPY-crosses this week exhibited that incoming speculation over the Fed’s policy path is being direction at the US Dollar. The headline barometers of risk in FX, the AUDJPY and the NZDJPY, were relatively unchanged at -0.12% and up +0.69%, respectively, between the release of the Fed’s policy statement on Wednesday and the weekly close on Friday. Barring significant event risk, the Yen only stands to benefit if QE3 speculation firms once more, provoking a flight to safety in FX. Without such a catalyst, the Japanese Yen may find struggle finding direction in the near-term.
With that said, it is important to note that there are themes developing which could change the Yen’s fortunes. While the Japanese economic calendar is rather quiet this week, there are several “high” importance events elsewhere on the DailyFX Economic Calendar. In fact, there are three central bank meetings (the RBA on Tuesday, the BoE and the ECB on Thursday) and four labor market reports (New Zealand on Tuesday, Australia on Wednesday, Canada and the United States on Friday).
Of these events, the ECB meeting on Thursday could pose the most risk to the Yen – the EURJPY specifically. While volatility readings remain near multi-month and multi-year lows across FX, it is worth pointing out that short-term EURJPY volatility measures have picked up (in absence of other JPY-crosses, like the USDJPY or GBPJPY). EURJPY 1-week implied volatility jumped to as high as 10.78% on Friday (November 1), its largest single-day jump since September 12 (pre-September FOMC positioning).
Over the past several years we’ve observed that higher sustained levels of volatility tend to be bearish for the JPY-crosses; heightened volatility in general tends to push traders into safer, more liquid assets. Yet recent history is not so clear for the EURJPY. In fact, the September 12 jump in 1-week implied volatility didn’t foretell EURJPY weakness; the pair gained +1.65% over the next 5-days.
When we step back and look at the forest rather than the individual trees, we see that the Yen has winds blowing in both directions guiding its price action. Continued high levels of global central bank stimulus – the continuation of the Fed’s QE3, the ECB potentially shifting more dovish this week after the horrible inflation data last week – make it difficult for the Yen to gain tractions relative to higher yielding currencies.
However, there may be more isolated instances of the Yen benefiting given certain event risk ahead, particularly against the Euro or the US Dollar. If the ECB moves towards more easing (another LTRO, a rate cut, etc.) or if the October NFP report shows further stagnation in the US labor market, both the EURJPY and the USDJPY could slip further, irrespective of how the EURUSD trades. With the upcoming Japanese economic calendar on the light side, Japanese data even-keeled the past few weeks and significant event risk abroad over the next few days, we believe a neutral bias for the Yen is appropriate as we wait for fundamental and technical trends to develop more cleanly. –CV
To receive reports from this analyst, sign up for Christopher’s distribution list.