Fundamental Outlook for Japanese Yen: Bearish

- Japan’s FinMin Says Economy Needs Trillions in New Fiscal Stimulus
- Merchandise Exports Boosted by Cheaper Currency in February
- Annual Retail Sales Fall Most in 7 Years

The Japanese Yen may correct higher as technical considerations temporarily overtake momentum from increasingly grim fundamental news. The economic calendar offers a familiar picture in the coming week: dwindling overseas sales are pushing Japanese companies to cut back production capacity, boosting unemployment to put downward pressure on consumer spending and overall economic growth. Indeed, industrial production is set to shrink at an annual pace of -38.1% in February, a new record low, while the Tankan survey of business confidence is expected to show sentiment is at the worst in over three decades. Meanwhile, labor market readings are seen deteriorating yet again while Household Spending falls for the 11th consecutive month in the year to February.

Importantly, while the data docket is definitively dour, it offers little that has yet to be priced into the Yen exchange rate. The markets have known for some time that the Japanese economy is in shambles: the currency’s safe haven status began to erode weeks ago when it was revealed that the economy shrank over 12% in the fourth quarter to enter the deepest downturn since the 1970s. The continuous barrage of dismal data has somewhat desensitized investors at this point, leaving the door open for a technical correction. To that effect, we see that the trade-weighted Japanese Yen index (measuring the value of the currency against a basket of top counterparts) has put in a convincing Bullish Engulfing candlestick pattern at a key pivot level that has acted has acted as both significant support and resistance since early October of last year. This hints persuasively at the possibility of a rebound, giving long-term Yen bears a second chance to enter the broad down trend.

Antonio Sousa is a Currency Analyst for FXCM.