Fundamental Forecast for Japanese Yen: Bullish
- ECB, PBOC Easing May Not Sustain Sentiment Trends Absent the Fed
- Risk Aversion to Fuel Carry Trade Unwind, Boosting the Japanese Yen
- Help Identify Critical Turning Points for USD/JPY Using DailyFX SSI
The markets navigated through a treacherous succession of high-profile event risk over the past two weeks, leaving investors with much to digest. Investors will have just such an opportunity in the week ahead as a lull in news-flow allows for a period of reflection. This process may pave the way for a recovery in the Japanese Yen after the currency slumped to a six-year low against the US Dollar.
The fragility of market-wide risk appetite is the key consideration. September began with an underwhelming easing effort from the European Central Bank (ECB). The markets were holding out for the launch “classic” QE – the purchase of government bonds with printed money – and didn’t get it. Confidence in another key component of the ECB’s stimulus package was shaken last week as the first TLTRO operation saw uptake of just €82 billion, far less than the expected €150 billion result.
In the meantime, the Federal Reserve seemed to move closer to the hawkish side of the policy spectrum. An updated set of policymakers’ interest rate projections suggested Janet Yellen and company now expect borrowing costs to be a full 25bps higher in 2015 than they thought in June. The markets have taken notice: traders are now pricing in 60bps in US policy tightening over the coming 12 months, the most in the G10 FX space.
This seems to bode ill for sentiment, which has managed to remain as resilient as it has been largely on the back of generous Fed accommodation over recent years. With the US central bank ever-closer to withdrawing its support and the ECB effort to replace it looking increasingly inadequate as a replacement, the threat of on-coming risk aversion appears to be growing.
China presents one mitigating factor. Risk appetite swelled after the PBOC unveiled a new SLF facility injecting CNY500bn into its banking sector considering the move amounted to the approximate equivalent of a 50bps RRR decrease. Optimism may prove fleeting however considering the liquidity provision has a defined 3-month shelf life however, whereas an outright RRR rate cut would amount to an open-ended loosening of policy. That means investors may not find lasting comfort in Beijing’s efforts.
Given the time to consider such macro-level forces, the markets may well conclude that the sum total of support offered by central banks outside of the US will not be able to replace the Fed at a foundation for sentiment trends. This points to a forthcoming selloff across the range of risky assets, opening the door for an unwinding of Yen-funded carry trades that sends the Japanese unit swiftly higher.