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Japanese Yen Shows Signs of Life but Does Rally Continue?

By , Quantitative Strategist
04 January 2014 00:04 GMT
Japanese_Yen_Shows_Signs_of_Life_but_Does_Rally_Continue_body_Picture_1.png, Japanese Yen Shows Signs of Life but Does Rally Continue?

Fundamental Forecast for Japanese Yen: Neutral

The Japanese Yen clawed back losses versus the Euro and US Dollar as traders took profits on JPY-short positions to start the New Year. It will be critical to watch price action in the days ahead as a pickup in economic event risk threatens big moves across forex markets.

An empty Japanese economic calendar leaves focus on a key European Central Bank interest rate decision as well as a critical US Nonfarm Payrolls report. Which way might the Yen move?

The JPY rallied as the previously-unstoppable US S&P 500 posted its single-largest daily decline in four weeks, and we might expect the inverse correlation to hold strong around critical event risk. According to futures positioning data, speculators were recently at their most net-short Japanese Yen (long USDJPY) on record. The first sign of danger in broader financial markets could spark a larger panic-driven wave of short-covering and drive the USDJPY lower.

To that end it will be important to watch whether the ECB signals further monetary policy easing is likely, and any disappointments could cause a sell-off in risk. Fresh policy action seems improbable at this stage but markets will scrutinize President Mario Draghi’s words for clues on future moves.

All eyes will then turn to an important US labor market report to gauge the likelihood of further US Federal Reserve policy action. The Fed shook markets as they unexpectedly began the so-called “Taper” of their Quantitative Easing purchases at their December meeting. Yet they’re far from done, and an especially strong US NFP print could potentially hurt ‘risk’ markets and drive the Japanese Yen higher against all except perhaps the US Dollar.

It is shaping up to be an important week for the Yen as the first full week of trading in the New Year may set the pace for some time to come. A continuation in the recent ‘risk’ sell-off could allow the otherwise-downtrodden Japanese currency to recover further from recent lows. - DR

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04 January 2014 00:04 GMT