Fundamental Forecast for Japanese Yen: Bearish
- Japanese Yen rallies sharply as Chinese trade data disappoints, sends Nikkei 225 lower
- Lack of action from Bank of Japan allows the USDJPY to drop to fresh lows
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The Japanese Yen rallied sharply versus the US Dollar and other major counterparts as the highly-correlated Nikkei 225 posted its worst weekly performance in 9 months. A drop in FX volatility prices nonetheless suggests the JPY could pull back in the week ahead.
A mostly empty Japanese economic calendar will shift attention to the upcoming US Federal Open Market Committee (FOMC) policy meeting. Yet few expect the Fed to announce any changes to the pace of its “Taper”, and we view any FOMC-driven volatility as relatively unlikely. It’s perhaps unsurprising to note that forex options markets have pushed USDJPY volatility expectations near their lowest levels in nearly seven years.
One major wildcard is the highly-anticipated referendum in Crimea, the contested Ukrainian region which has forced a chasm between the West and Russia and threatens to destabilize East/West relations. It’s important as traders not to get lost in the minutia of political developments around the world; it’s often maddening and counterproductive. But if citizens of Crimea vote to secede from Ukraine and rejoin Russia, the United States and European Union may follow through on threats of significant economic sanctions against Russia.
Such an event would likely generate significant financial market volatility and an important flight to safety. In such an instance the Japanese Yen would almost certainly rally against major counterparts.
Beyond that, traders will watch developments in the Japanese Nikkei 225 and look for any surprises out of late-week commentary from Bank of Japan Governor Kuroda. If the Yen continues higher we can arguably expect Kuroda to react and comment on exchange rate movements. Yet recent BoJ rhetoric suggests that the central banker sees relatively little scope for expanded monetary policy easing. Thus there is little reason to expect significant moves out of the Japanese Yen absent a substantive turn lower in ‘risk’ markets. – DR