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Yen Tumbles Despite Broader Risk Aversion, Divergence May Present Profit Opportunity

Yen Tumbles Despite Broader Risk Aversion, Divergence May Present Profit Opportunity

2010-03-24 21:02:00
John Rivera, Currency Analyst
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USD/JPY

The yen tumbled throughout the day despite a broader pull back in risk appetite which is generally supportive for the funding currency. We could be seeing Japanese investors catching up with bullish trending markets after being closed the first two trading days of the week. Most likely we just saw a broad based dollar rally and support increased as technical levels were broken pulling in sideline investors. This could be an opportunity for Yen bulls if risk aversion continues as the pair has seen its correlation with stock markets strengthen to 58% from 39% a month ago. Conversely, a rebound in equity markets could be ahead and further strength may be in store. Meanwhile, U.S. yield expectations have also seen their influence grow and with the outlook for a rate hike dimming it has been a weighing factor for the pair.

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BoJ Interest Rate Expectations

Markets are pricing in a zero percent chance that the BoJ will raise rates anytime in the next year. In fact speculation is that the central bank will initiate quantitative easing measures as they look to battle deflation. Indeed, Japanese consumer prices are expected to have fallen by 1.1% in February which would be the 12th straight monthly decline. However, the pace of deflation is slowing which has removed the urgency for additional measures from policy makers. Discuss this and trading ideas join the USD/JPY forum.

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FOMC Interest Rate Expectations

A better than expected print in U.S. durable goods orders ex. transportation of 0.9% versus 0.6% slightly improved the outlook for a rate hike. However, most of the optimism generated was quickly reversed by a disappointing new home sales report as the housing sector has started to slow with the end of the government tax credit approaching. Upcoming initial jobless claims will have an impact on the outlook for next weeks’ Non-farm payroll report. Early forecast are calling for a gain of 195K which would significantly raise the outlook for tightening.

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Risk

Fitch’s downgrade of Portugal’s debt rating raised concerns that other nations will have trouble paying back the large deficits that they have accumulated in ending the recession, sending equity markets lower. Strong employment and growth figures to end the week could spark optimism heading into next week where the labor report is expected to show job growth. The weakness sin the housing sector could become a weighing factor as it was the culprit for the credit crisis and its recovery is seen as a key to a return to longer term growth. Additionally, the construction industry has been the main contributor to job losses and without job growth in the sector, unemployment will most likely remain at current elevated levels. Discuss this and other fundamental data in the Economics Forum.

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To discuss this report or be added to the email list contact John Rivera, Currency Analyst: instructor@dailyfx.com

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