Fundamental Outlook for Japanese Yen: Bullish

- Japanese Yen finishes stronger despite passage of US Financial Bailout
- DailyFX analysts give their own forecast for the USDJPY
- Carry trade finds little relief in bailout approval

The US legislature’s vote of approval the US Treasury’s bailout of financial markets failed to lift downtrodden stock markets, and the impressive Japanese Yen rally made it the only G10 currency to finish higher against the US dollar through the week’s close. Passage of the “Troubled Asset Relief Program” (TARP) did not provide the boost that wary stock market bulls had hoped for, and indeed we saw that the S&P 500 actually finished the week at its lowest in four years. Bears clearly remain at the reins of stock market price action, and heightened risk aversion makes the Japanese Yen an attractive bet through medium term trade. One has to subsequently wonder whether there is anything that US lawmakers or anyone can do to lift downtrodden stocks and return confidence to global financial markets. Absent noteworthy improvement, the Yen looks likely to continue its rally against major G10 counterparts.

The week ahead promises comparatively little in the way of recently market-moving event risk, but traders should watch out for any surprises from a Bank of Japan interest rate decision and minutes from the US Federal Reserve’s most recent policy-setting meeting. The Bank of Japan is highly unlikely to make any changes to its already-low 0.50 percent target interest rate, and traders will effectively be listening to any significant shifts in policy from the monetary authority. An ostensibly busy schedule of Japanese economic reports later in the week is subsequently unlikely to force major moves in JPY pairs, and instead traders will likely take their cues from global stock market price action.

US stock markets will likely remain volatile in the coming days, and we can expect the Yen to track movements in US and other global equity markets. With that in mind, it will be important to watch reactions to the highly-anticipated release of Minutes from the US Federal Reserve’s most recent policy-setting meeting. We already know that the Fed unexpectedly left rates unchanged, but it is unclear exactly how close the Fed came to lowering rates amidst clear financial turmoil. Subsequent developments in global markets leaves traders predicting at least 50 basis points in interest rate cuts through the Fed’s October meeting, but such forecasts could easily change on the release of FOMC minutes through Thursday. Yen traders will be sure to keep an eye out for market-moving Fed minutes, as developments in risky asset classes are likely to dominate price action in the low-yielding Japanese currency.

David Rodriguez is a Currency Analyst at FXCM.