Japanese Yen Forecast to Gain until Status Quo ChangesJapanese Yen Forecast to Gain until Status Quo Changes

Fundamental Forecast for Yen:Bullish

The Japanese Yen rallied for the fourth-consecutive week versus the Euro and British Pound, but a week of strong US economic data and disappointments out of Japan helped the USD/JPY exchange rate break its recent losing streak. US Dollar and Japanese Yen traders look to a potentially significant week ahead with the weekend’s G20 summit and the highly market-moving US labor market report on tap.

The Japanese Yen in particular could see big volatility if the world’s top central bankers surprise markets and issue strong statements or announce fresh policy responses to ongoing market turmoil. And of course a key theme is ongoing FX market volatility itself—any signs of cooperation among G20 central bankers would likely force big moves across the board. Concrete policy responses remain admittedly unlikely, but it is set to be a rocky Sunday night market open given clear uncertainty heading into the G20 summit.

FX traders will then turn their attention to upcoming US Nonfarm Payrolls data and the typical slew of US economic data leading up to the big result. A positive surprise in recent US Q4 GDP figures raises the weight of expectations for the US Dollar—particularly as the Greenback remains closely-linked with expectations on the future of US Federal Reserve monetary policy. It is well-known that Fed officials place considerable weight on unemployment figures when setting interest rate policy, and any surprises could easily erase recent USD gains.

The Japanese economic calendar is comparatively less likely to force big FX market moves, but trader should nonetheless keep an eye on Japan Retail Sales, Industrial Production, and Jobless Rate figures due in the week ahead. A recent Japanese Consumer Price Index inflation report admittedly told us most of what we needed to know—the lack of domestic inflation means that the Bank of Japan will likely keep policy unchanged through the foreseeable future. As we argued last week, the status quo keeps momentum in the JPY’s favor. It would take a substantive shift in policy expectations to change the trajectory for the USD/JPY and other Yen pairs.

Ongoing financial market volatility benefits the Japanese Yen, and this in itself could push the JPY higher (USD/JPY lower) until further notice. The past week of US S&P 500 rallies suggests that market jitters may have calmed, but the potential for continued turmoil leaves us cautious until further notice. Keep an especially close eye on Chinese financial markets—the Yen acts as a strong proxy for sharp moves in the world’s second-largest equity market.