fundamental alert

Japanese Yen Remains Strong as S&P 500 Falls to Worst Levels Since 1997, BOJ to Leave Rates Unchanged

Thursday, 20 November 2008 23:39:37 GMT  |  Terri Belkas, Currency Strategist

The Japanese yen generally remains below its October 24 highs, but looks likely to push even higher as volatility climbs to record levels and US stock markets tumble.

In fact, the major equity indexes all fell more than 5 percent, with the Dow Jones Industrial Average closing at its lowest level since 2002 and the S&P 500 finishing at 11+ year lows. Investor sentiment has been the key trend we’ve been following in the forex markets, as bouts of risk aversion that lead equities lower tend to benefit the Japanese yen. According to our latest forex correlations report, the correlation between USD/JPY and the Dow is near the highest levels in at least 20 years, and with stocks likely to fall even lower, the outlook suggests the Japanese yen could gain much more.

In economic news, the Bank of Japan was one of the least-followed central banks around just a few months ago, but given their surprise 20bp rate cut last month to 0.30 percent, the BOJ now has the market's attention. Tonight, the BOJ is expected to leave rates unchanged, but it will be important to get a sense of what the Monetary Policy Committee expects for growth and inflation going forward. Bearish investors are betting that many central banks will move towards Zero Interest Rate Policy (ZIRP) in coming months, a policy Japan implemented in the 1990's and essentially stuck with until July 2006. This speculation has only been exacerbated by the Swiss National Bank's surprise 100bp rate cut to 1.00 percent, as the SNB was not even scheduled to meet again until December following their participation in the October 8 coordinated rate cuts with the Federal Reserve and European Central Bank, among others. If global rates are indeed moving towards zero, Japan would logically be the first to get there once again since rates are already extremely low at 0.30 percent.

Related Article: Japanese Yen May Rally Through GDP Numbers on Carry Flows


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