Fundamental Forecast for Japanese Yen: Bearish
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The Japanese Yen had a mediocre week, only finding solace in the fact that emerging markets were in mini-meltdown mode and therefore its role as a safe haven was revived. But against the European currencies and the US Dollar – all of which have seen a patch of improved data – the Japanese Yen struggled considerably.
The CHFJPY and EURJPY lead the way, adding +1.69% and +1.63% respectively, as the Euro finally started to respond to some of the improved data over recent weeks, while emerging market capital outflows could be finding home in the Switzerland as a haven as well. Profit taking in the GBPJPY saw the pair give back its gains to +0.83% for the week, while the USDJPY hit a three-week high above ¥99.00, before closing up by +1.22% and a hair under 98.70.
Certainly, recent constructive price action in the European currencies and the US Dollar against the Yen would lead one to believe that risk concerns were abating. True, growth prospects have improved on both sides of the Atlantic. The commodity currencies are signaling something completely different. So where does this leave the Yen – as a funding currency or as a safe haven?
Ultimately, when the chips fall, the Yen should end up on the weaker side for its own problems, much less boosted by concerns abroad. The type of investor behavior seen in Asian markets the past few weeks has offered a reminder of the 1997 Asian crisis; though with considerable foreign reserves built up, it’s unlikely that market panic reaches those similar epidemic proportions, at least anytime soon.
With Chinese manufacturing data calming fears – even on the private sector gauge which has been much more bearish than the official government reading – it’s possible that Asian-Australasian-borne concerns abate soon; and this could spur some risk taking to weaken the Yen. The same can be said about Europe and North America – with growth pointed higher, the Yen serves little purpose as a safe haven beyond the speculative role against QE3 at the moment.
So then what will be the issue to derail the Yen out of Japan? It could be two-fold – both monetary and fiscal. On the fiscal side, the Japanese debt burden just passed ¥1 quadrillion. As such, Prime Minister Shinzo Abe’s government is readying to announce a sales tax hike of 3%, from 5% to 8% (which rings the memory of the Asian crisis, when Japanese fiscal tightening alongside American monetary tightening exacerbated credit issues).
If a sales tax is indeed on the way to help shrink the growing debt burden, we’ll learn more this week as government officials are holding meetings all week on the very issues. Recall that a few weeks ago the possibility that there would be no sales tax boosted the Yen; now the situation is reversed.
Likewise, if there’s a sales tax hike, then the Bank of Japan might have to introduce further easing measures to help fight a downturn in inflation. If consumption is squeezed, demand falls, and price pressures are reduced. With growth already underperforming expectations, it’s possible that inflation begins to follow. We’ll get insight into that picture this Thursday when the July National Consumer Price Index is released (+0.7% expected from +0.2% (y/y)).
Growth has indeed lagged, with the 2Q’13 GDP print in at +2.6% versus +3.6% expected, and the prior revised lower from +4.1% to +3.8%. Japanese data on the whole has been disappointing since mid-July, and we thus suspect that a miss on the July CPI reading could occur.
As such, in light of some weaker data expected and the exogenous issues surrounding the Yen abating, we find that Japanese domestic concerns will prevail and pressure the Yen over the coming five trading days. –CV
--- Written by Christopher Vecchio, Currency Analyst
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