Fundamental Outlook for Japanese Yen: Bearish

- USD/JPY, Dow Jones Correlation Near 20-Year High
- Japanese Vehicle Sales Lowest Since at Least 1980
- Yen to Retrace Recent Gains against the Euro

The Japanese Yen could reverse recent gains next week as seasonal capital flows create the perception of a boost to risk appetite. Last week, we suggested that stock markets may rise in December as traders prepare for the end of calendar year.Investors often intentionally close some positions at a loss in December to offset the capital gains tax burden. This then pushes shares higher through January as positions are re-established (a phenomenon called the “January effect”). Considering the massive drop in share prices this year, the only traders with any meaningful gains to be taxed were positioned short. Closing out some of this exposure will mean buying back shorted stock and thereby pushing markets higher. Considering the Yen remains 96% inversely correlated with the Dow Jones Industrial Average and 95% inversely correlated with the broader MSCI World Stock Index, the currency will suffer loses should this materialize. Initial signs that stocks are being buoyed by seasonal factors have slowly started to emerge: shares closed Friday’s New York session with a gain of 3% despite news that the economy lost 533k jobs in November, the worst reading in 34 years, sending the Yen lower against nearly every other major currency.

While the economic calendar features several prominent releases, these are unlikely to usurp the dominance of stock performance in setting the Yen’s trajectory. The Current Account surplus is expected to continue to narrow in October as an expensive currency and dwindling global demand punish exporters. The Eco Watchers survey is likely to see merchant sentiment continue to make new lows as acute deterioration in employment crushes consumers’ willingness to spend. October’s Leading Index and November’s Corporate Goods Prices metrics are also unlikely to cause much volatility as their decline is merely a reflection of a recession in the world’s second-largest economy that has long been priced into the markets. To that effect, the final revision of third-quarter GDP figures are likely to have less impact still.

Antonio Sousa is a Currency Analyst for FXCM.