Japanese Yen To Gain As Seasonal Capital Flows Reverse

Fundamental Outlook for Japanese Yen: Bullish

- Rebound in liquidity promises to redefine direction for risk sentiment
- Japanese Yen was top performing major currency last year

We suggested some weeks ago that seasonal forces would push the Yen lower in December, reckoning that a counter-trend retracement in stock markets would put downward pressure on the currency through its strong inverse correlation to risk appetite. We reckoned the uptick in stocks would materialize as short traders purposely closed out some exposure to offset some of their capital gains burden (creating the inverse of what is commonly called the “January effect” in rising stock markets). Indeed, the MSCI World Stock Index registered the first net monthly gain after six consecutive declines in December, adding 3%, while the Yen lost -3.25% against an average of the world’s top currencies. If the up move in risky assets represented a temporary seasonal reversal, we should see begin to see a return to broader, long-term trends in January, sending stocks lower and the Japanese Yen higher.

The economic calendar offers little that has not already been priced into the exchange rate and is unlikely to usurp dominance from risk trends over Yen price action. Vehicle Sales are likely to continue falling in December as Japan’s deepening recession brings higher unemployment and shrinking consumer spending. Indeed, expectations call an index of Japan’s leading economic indicators to print at 81.4 in November, the lowest in over a decade. Outstanding corporate loans may rise again in November after the Bank of Japan agreed to accept commercial paper as collateral to boost credit access.