Yen Finds Support On Flight To Safety, Ahead Of BoJ Rate Decision

USD/JPY

The USD/JPY traded lower on the day with yen crosses benefitted from a flight to safety, as concerns continue to linger that current valuations for stocks have outpaced future growth. Rising unemployment leaves little hope that consumers will be ready to take the consumption baton from government stimulus, increasing the chances of a second dip in growth. Nevertheless, the pair’s relationship with risk remains low at 11% down from 20% a week ago, as the greenback’s status as a funding currency saw it also find support from prevailing risk aversion. Japanese interest rate expectations generally have little sway over price action but they will come into focus with the BoJ rate decision on tap tomorrow.

BoJ Interest Rate Expectations

The upcoming BoJ rate decision will be interesting as policy makers are expected to have an upbeat outlook on growth but remain committed to keeping interest rates low. Meanwhile, the Japanese government is on the verge of declaring that the economy is in a deflationary period which would be a contradiction to the central bank’s optimism. Finance Minister Hirohisa Fujii said on Thursday the Bank of Japan was not taking monetary policy steps that ran counter to government policy in effort to deflect from the potential conflict. "We hope to work closely with the BOJ," Fujii told an upper house financial committee.

FOMC Interest Rate Expectations

U.S. interest expectations continue to decline with Fed Fund futures now pricing in only a 10.1% chance of a rate hike in March which is down from 38.0% a month ago. Initial jobless claims holding flat at 505K from a week ago and a 0.4% improvement in the leading indicator gauge didn’t offer up anything new that would change yield expectations. The OECD revised its U.S. growth outlook for 2010 to 2.5% and expects that the central bank will keep rates on hold until 2011. However, they did warn that inflation could rise if the withdrawal of liquidity begins too late.

Risk

Although risk trends haven’t had a significant impact on the USD/JPY, they have grown in influence on the Yen and must be taken into account when trading the pair. The sharp fall in stocks on the day helped fuel Yen support and if we continue to see concerns over future growth then more weakness could be ahead. Further bearish sentiment is a realistic expectation if the current trading pattern holds and leads to another test of trendline support. A downgrade of chipmakers and negative analyst talk on banks cause indices to trade lower on the day. We may start to see a pattern of downgrades develop if growth estimates start to fall making current valuations unjustifiable.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com