Fundamental Forecast for the Japanese Yen: Bullish

Forecasts for the Japanese yen improved on the week, as the largest bank failure in US history and broader financial market instability boosted outlook for the heavily risk-linked currency. The low-yielding Japanese Yen typically benefits in the face of broader market risk aversion, and a 2.15 percent weekly drop in the US Dow Jones Industrials Average forced similar declines in the Yen-based carry trade. Increased uncertainty surrounding the US Treasury’s plan to purchase troubled assets from beleaguered financial institutions led to similar indecision in global risky asset classes. And whether or not the US Congress is able to pass necessary legislature to approve the Treasury bailout plan will likely be a key point in determining near-term direction in the Japanese yen and other risk-sensitive traded instruments.

- Japanese Yen may rally on largest bank failure in US history, financial difficulties
- DailyFX analysts give their ownforecast for the USDJPY
- Carry trade and Yen outlook could shift on financial crisis and ongoing bailout discussions

An ostensibly busy Japanese economic calendar is unlikely to drive USD/JPY price action; instead, developments surrounding the US Treasury’s plan to bail out credit markets will steal headlines and dominate direction in the risk-linked yen. Stock markets seemed all too willing to move on any indication that the deal would or would not go through, and such trader indecision will almost definitely continue until final resolution for the Treasury’s proposals. Already we see that nervous markets are betting on which major financial institution will fail next, and it seems only a matter of time before another flare-up in credit market tensions. Such distressed market conditions typically bode well for the Japanese Yen, and it seems increasingly likely that we see further USD/JPY declines before a noteworthy rebound.

David Rodriguez is a Currency Analyst at FXCM.