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Japanese Yen Reverses Sharply, but Rally May not be Over Yet

Japanese Yen Reverses Sharply, but Rally May not be Over Yet

David Rodriguez, Head of Product


Japanese Yen Reverses Sharply, but Rally May not be Over Yet

Fundamental Forecast for Yen: Neutral

The Japanese Yen finished the week nearly unchanged as an early-week surge gave way to a similarly dramatic late-week reversal. Its next move will almost certainly depend on the next developments in the ongoing Greek debt crisis and recent volatility in Chinese equity markets.

It was setting up to be an important week for the Yen as troubles in Europe and significant declines in China’s previously high-flying equity market led to a jump in demand for the safe-haven Japanese currency. And indeed the Yen remains in a position to outperform if market conditions deteriorate once more. Yet an important breakthrough in Greek debt negotiations and a noteworthy bounce in Chinese stocks led to a sharp improvement in broader sentiment; the Japanese Yen tumbled in kind. The next question is obvious: is this a lasting turning point or a false dawn for global equities?

Economic event risk will be limited next week and as such the focus will remain squarely on financial market conditions. With that in mind it will be critical to watch how Chinese and broader Asian markets start the week’s trading; recent correlation studies show that the Yen is among the most sensitive to moves in China’s Shanghai Index. The bounce in Chinese equities and the broader market rallies are certainly encouraging, but clear uncertainty remains.

Much of the renewed optimism comes on the heels of a positive breakthrough in Greek debt negotiations. Yet anyone who’s followed this saga over the past five years can tell you that things can and have changed in an instant. The coming week’s European Central Bank interest rate decision will be of special interest to Greece-watchers; any surprises from ECB President Mario Draghi could turn sentiment in an instant.

We’ll keep an eye on China, Greece, and broader financial market risk sentiment to gauge likely direction in the Yen. Volatility prices have picked up from recent lows, and we suspect we have not seen the last of the panic-driven JPY gains. – DR

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.