Fundamental Outlook for Japanese Yen: Bullish

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The Japanese Yen was the worst-performing G10 currency through the past week’s trade, as a clear (if temporary) improvement in financial risk appetite led the currency substantially lower against higher-yielding counterparts. The JPY nonetheless benefited from intra-week flare-ups in financial market tensions—including a Russian sovereign debt rating downgrade and various disappointments in major economic data. Such positive reactions to bearish financial market developments leave the Yen in an ideal position to benefit from deterioration in risk appetite. Given a near-constant stream of bearish global economic developments and clear downtrends in global risky asset classes, it is perhaps unsurprising to note that our overall trading bias remains bullish for the JPY. Of course, short-term developments could just as easily force further retracements in the previously high-flying Japanese currency.

Trends in the foreign exchange market and broader asset classes favor ‘short-risk’ trades, and the Japanese Yen continues to be a prime recipient of such fear-related money flows. JPY price action in the week ahead will subsequently depend on the trajectory of the US S&P 500 and other key risk barometers. That being said, predicting short-term price action in extraordinarily volatile assets remains nearly impossible. We would otherwise look to key economic event risk out of any given economy to dictate price action in the domestic currency, but FX traders have proven almost completely indifferent to Japanese economic fundamentals. Such dynamics admittedly make it difficult to provide a weekly trading outlook with relative conviction.

We will continue to defer to broader price trends as far as the Japanese Yen is concerned, and its incredible ascent against all major global currencies leaves our medium-term trading bias firmly to the topside. Watch for major market moves surrounding the 5 key Forex Market Events in the week ahead—especially as it relates to broader risk trends. A resumption of the global bear market in major equity indices would almost definitely leave the Japanese Yen higher against major counterparts.
David Rodriguez is a Currency Analyst at FXCM.