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Video: Japanese Yen Stands at Center of Key Risk, Monetary Policy Themes

Video: Japanese Yen Stands at Center of Key Risk, Monetary Policy Themes

John Kicklighter, Chief Strategist

Talking Points:

  • The USD/JPY 4.2 percent advance this past week was the largest since November 2009
  • Yen crosses were bolstered more by the vow from PM Abe of fresh fiscal stimulus than a lift from risk trends
  • The combination of risk trends and 'effective' monetary policy implementation are critical for the Yen

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

The Japanese Yen has been one of the most active majors - in terms of volatility and trend - through 2016. That is because the currency lays direct lines to the most polarizing fundamental themes in the global financial system: risk trends and the influence of monetary policy. Through the first half of the year, circumstances aligned such that USD/JPY and the other Yen crosses carved out impressive bear trends. However, with recent developments for the vow of extra-ordinary financial support for the economy (and indirectly the currency) and new highs on certain 'risk' benchmarks; the Yen's fundamental outlook is anything but clear.

Last weekend, Japanese Prime Minister Shinzo Abe received strong support for Abenomics when the Upper House elections resulted in strong support for his ruling coalition. In turn, he called for fresh stimulus to help fortify the country. While there are few details on what this may entail, it nevertheless works against the growing skepticism over the Bank of Japan's ability to keep the currency devalued that had carried the bulk of the USD/JPY's tumble below 116 after the introduction of negative rates back in late January. Will the stimulus be enough? Doesn't it hold direct implications for exchange rates? Is global monetary policy generally lacking? These questions will bolster volatility and curb trend.

Meanwhile, the influence of general sentiment trends that drive the correlation to carry interests can offer a decisive market impact - though it comes with a heavy bias. Benchmarks like the S&P 500 have climbed to record highs this past week and have been rising since shortly after the Brexit panic settled. Yet, the Yen crosses only recently started to climb in support. Hesitation to fall in with the speculative yield chase may ease with Abe's pledge, but risk aversion will likely command overwhelming capitulation. What does the Yen tell us about the broader market forces and what will direct it moving forward? That is the subject of this weekend's Strategy Video.

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

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