Fundamental Outlook for Japanese Yen: Bullish

- Market Threatens To Revive Carry Unwinding As Recession Fears And Deleveraging Efforts Loom
- Word Of A Chinese Bailout And The US Shifting Focus To The Consumers Can’t Quell Fears
- What Should We Expect From The Dollar – Japanese Yen Pair Over The Coming Month?

The vacillation in risk appetite has been constrained for most of November; but the steady rise in volatility and refocus on larger fundamental themes in the currency market promise breakouts and revived trends. Considering its sensitivity to fear and greed in the currency market, the Japanese yen will act as a barometer to market conditions in the week ahead. To start the week off, risk trends will look for any accelerants in the G20 meeting. Over the previous weekend, the group issued a statement that announced they were prepared to act “urgently” to fortify financial markets and global growth. As compelling as this may sound, verbal warnings have little sway over traders who know the market responds to unwavering economic and speculative trends. To turn such a prevalent force – even temporarily – officials will need to offer the market policy steps that show a global effort is genuinely being made to stabilize the worst recession and credit crisis since the Great Depression. Confidence in this event however is low as political barriers are significant while substantial efforts made so far (individual bailout plans, massive liquidity injections and sharp rate cuts) have yielded little so far. Expect promises for fiscal stimulus from all members, collaboration on international regulation and warnings that lending rates will be lowered further.

Should the G20 fall short in their efforts to revive lender and investor confidence, market conditions and the primary fundamental drivers underlying the market will swell. Though carry interest, equity markets and other risk-sensitive assets have stalled since the turn of the month, volatility has moved back towards record highs. Like a breakout in price action, one side of the market must give: congestion or volatility. The better probability is for breakouts to revive the dominate bear trend in yen crosses. The odds are clear when we consider the factors that brought us to this point: forecasts of an economic slump and a surge in risk aversion. Even conservative market regulators forecast a global recession; and data already suggests it will be far worse than a short-lived slump. As for risk trends, returns are naturally depressed when growth stalls and fear will be driven by the knowledge that far too much credit and leverage is still floating around the market.

Also, we should not ignore the top-tier event risk on the economic docket this week – even if it does have little impact on immediate price action. The first reading of 3Q GDP is scheduled for release early Monday morning in Tokyo. While risk aversion naturally diverts capital to the Japanese yen, eventually fear will abate; and when it does, investors will look to reallocate their capital into those economies that have ultimately recovered from the global economic recession first and with the least damage. If economists’ expectations prove correct, Japan will be in good form. However, considering the country’s dependence on foreign consumers and its long history as a net saver, these is little doubt, Japan will trail the inevitable rebound. The other event to watch will be the BoJ rate decision. There is little chance that the central bank will lower its rates again; but it will be interesting to see any comments made after the event. Unless they come up with a unique policy plan, the market will no doubt label the group effectively impotent in the ongoing crisis.

Antonio Sousa is a Currency Analyst for FXCM.