jpy fundamentals

Japanese Yen Forecast Turns Bullish as S&P 500 Tumbles

Friday, 03 July 2009 19:01:24 GMT  |  David Rodriguez, Quantitative Strategist

Japanese Yen Forecast Turns Bullish as S&P 500 Tumbles

Fundamental Outlook for Japanese Yen: Bullish

- Japanese Yen rallies following disappointing US Nonfarm Payrolls
- Domestic Retail Trade data points to weak consumer demand
- Forex Seasonality suggests that Japanese Yen could decline in July

A disappointing week for the US S&P 500 and broader financial markets made the Japanese Yen a top performer, and a broader return to risk aversion could continue supporting the JPY through near-term trade. Highly anticipated US Nonfarm Payrolls data showed that the domestic labor market shed far more jobs than economists expected—sparking pronounced sell-offs in the highly risk-sensitive S&P 500 and sympathetic moves in global equity indices. Indeed, the disappointing NFP result ended a relatively benign streak in domestic economic data and squashed hopes of continued improvements in the world’s largest economy. The relatively dour mood surrounding risky asset classes leaves short-term trends in the safe-haven Japanese Yen’s favor, and we could continue to see JPY appreciation through the week ahead.

We continue to argue that the S&P 500 and other risk barometers remain overbought; impressive rallies off of multi-year lows leave risk for substantial pullback. The past week of declines actually leaves the S&P 500 in negative territory for 2009, but the index remains an impressive 35% above February’s trough. This has in turn pushed the highly speculative New Zealand Dollar/Japanese Yen (NZDJPY) currency pair a similar 37% off of yearly lows, and it may be only a matter of time before we see noteworthy correction. Indeed, our Senior Strategist argues that key Japanese Yen crosses may have topped through recent price action.

Fundamental price drivers will be limited in the week ahead, and it will be far more important to monitor developments in global financial markets. It is worth noting that the USDJPY-S&P 500 has weakened significantly through past months of trading; forex investors have bought both the US Dollar and Japanese Yen through times of market stress. Yet the NZDJPY-S&P 500 correlation remains near record-highs, and anyone looking to trade shifts in financial market sentiment may be better served through other pairs. Barring a substantial turn of events, the USDJPY may continue to trade in its 95.00-97.00 range through the past weeks of currency trading.   - DR
 

 

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