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Japanese Yen Volatility Near Guaranteed on Huge Week for Markets

By , Quantitative Strategist
24 January 2014 23:18 GMT

Japanese_Yen_Volatility_Almost_Guaranteed_on_Huge_Week_for_Markets_Copy_body_Picture_3.png, Japanese Yen Volatility Near Guaranteed on Huge Week for Markets

Fundamental Forecast for Japanese Yen: Neutral

The Japanese Yen took the forex world by storm as it rallied against all major currency counterparts, finishing the week at monthly highs versus the US Dollar and Euro. A busy economic calendar ahead and a build in FX volatility prices points to another big week for the Japanese currency and broader markets.

Price action reminded us that nothing can go up (or down) in a straight line as the USDJPY moved virtually tick-for-tick with the S&P in retracing some of their recent gains. The critical question becomes whether this is merely a correction within a much larger USDJPY and equity market bull market or the start of a larger Japanese Yen and ‘risk’ reversal.

We see several key factors that suggest the JPY may yet rally to fresh highs versus the Euro and US Dollar. Yet the coming week’s US Federal Open Market Committee (FOMC) interest rate decision and Japanese Consumer Price Index (CPI) Inflation data may set the tone for Japanese Yen moves through the foreseeable future.

All eyes turn to the FOMC as nervous investors digest recent stock market sell-offs and whether Fed officials will continue the “Taper” of its Quantitative Easing purchases. A Bloomberg News poll shows that 67 of 71 economists believe the Fed will enact at least another $10B in Taper. Given that the Taper is mostly bullish for the US Dollar and domestic interest rate expectations, we expect a “No-Taper” decision could send the USDJPY to fresh lows.

Yen volatility will likely continue into the following day as a highly-anticipated Japanese CPI inflation report could spark big USDJPY moves. The Bank of Japan’s Quantitative Easing measures have been a major driver of JPY declines (USDJPY gains), but recent inflation readings warned that rising price pressures may prevent the BoJ from enacting more aggressive QE policies. The consensus forecast calls for core CPI inflation to remain at 5-year highs through December, but any topside surprises could quickly drive further Yen gains.

It’s shaping up to be a big week for the Japanese currency, and our Senior Strategist highlights major price levels at which the USDJPY pullback could accelerate. We’ll keep a close eye on economic data and whether financial markets can recover from recent turmoil. It’s especially worth noting that S&P 500 performance in the month of January has predicted February-December moves with just over 60 percent accuracy. We’ll keep the so-called “January Effect” in mind as we watch how stocks finish into the final days of the month. - DR

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24 January 2014 23:18 GMT