Fundamental Outlook for Japanese Yen: Bearish

- Corporate Service Prices Lowest in 5 Years
- Meeting Minutes Reveal Bank of Japan Divided on Future Policy
- Top Economic Indicators Sink Lower as Recession Deepens

Forex traders may see the Japanese Yen lose ground as seasonal forces take hold of the financial markets on approach to the end of the calendar year. The Japanese Yen will see little impetus for directional momentum from the economic calendar next week, once again tying the currency to trends in risk sentiment. A handful of low-level releases begin with Labor Cash Earnings: expectations call for a slight downtick to 0.1% in the year to October from a revised 0.2% in the preceding month, but acute deterioration in the jobs market may open the door a downside surprise. November’s Vehicle Sales look certain to remain under pressure having traced 9-year lows in recent months. Stagnant wages, scarce jobs, record-low consumer confidence and globally tight lending markets hardly make for the kind of environment where buyers will commit to big-ticket purchases. Capital Spending is expected to register at a new 6-year low of -9.8% in the third quarter, dwarfing the -6.5% decline in the three months through June. On balance, these releases are unlikely to matter a great deal in setting the trajectory of the Yen: the currency has appreciated rapidly on flows driven by risk aversion, turning a blind eye to deteriorating fundaments over recent months.

Fundamental data aside, forex traders may see the Japanese Yen lose ground as seasonal forces take hold of the financial markets on approach to the end of the year. Specifically, stock traders often deliberately close out a portion of their trades at a loss toward the end of the year to offset some of their capital gains tax burden. Considering the precipitous fall in stock markets this year, it would stand to reason that those traders that have bought stock are unlikely to have many gains speak to of. Conversely, short sellers have done rather well betting on a market decline. It is these traders that will be looking to protect their capital gains by closing out some of their exposure with losses. To close a short position, traders buy back the stock that they sold, bidding up share prices in the short term. We have clearly noted that the Japanese Yen has seen a strong inverse correlating with stocks for much of this year. Indeed, USDJPY now shows a hefty 96% correlation with the Dow Jones Industrial Average and a 94% correlation with the broader MSCI Index of global stock performance. If seasonal year-end flows push stock prices higher, the Japanese Yen could stand to correct lower in the near term. A similar counter-trend bump registered last year: stocks peaked in October, sold off a substantial 10.4% into the end of November, then retraced over 50% of the down move through December before selling resumed in earnest in the New Year.

Jamie Saettele is a Technical Currency Analyst for FXCM.