Fundamental Forecast for Japanese Yen: Neutral

- Earnings season draws to a close; but where does that leave risk appetite?
- Japan’s trade balance improves as both imports and exports plunge
- Yen crosses don’t offer a clear cut technical outlook

Direction from the Japanese yen is often the product of risk appetite; and the fundamental outlook for next week doesn’t suggest this essential correlation will break any time soon. However, this connection may actually complicate the future for speculators rather than make it more straightforward. The primary source of what has essentially been a market-wide advance in risk appetite these past two weeks seems to have petered out. Earnings releases are in decline and there are very few individual releases on the docket that can initiate a global shift in sentiment on its own. Among other potential catalysts – like growth speculation – there are many contingencies and shades of gray that could make the yen a very difficult currency to trade going forward.

First and foremost, the market will have to reconcile its predilection for earnings data. Ever since Goldman Sachs reported record profits through the second quarter (a strong sign considering it is a financial firm, struggling with a global recession and it had just repaid a rescue loan from the US government), market participants have been putting their sidelined funds back into the capital markets to make a competitive return. However, through the end of this past week, we have seen upside surprises diminish and the notoriety of those companies names attached to the earnings reports recede. Looking back on the week four Fed ‘Stress Tested’ banks report losses and many more blue chips missed forecasts. Looking ahead, there are very few major reports due; but more importantly, there are far fewer days when a group of notable earnings releases will be reported at the same time (and therefore can generate enough influence to catalyze risk appetite. One of the last opportunities for a earnings related swell is on Thursday when ExxonMobile, MetLife, Walt Disney, Dow Chemical, Travelers and Colgate are scheduled to release.

If we are to see the market move away from earnings, where should we expected the market’s drive to come from? Sentiment can be a catalyst of its own. Left to their own devices, speculators are capable of reviving and breaking major trends. Equities across the world were able to capitalize the rise in optimism over the past two weeks and record new highs for the year. If the market decides that this has turned the tides for yields and investment flows, the rest of the markets may look to play catch up and in turn leverage risk appetite in the process. There may also some fundamental factors choosing a rise or fall in sentiment. There are many growth-related indicators on the docket to feed the outlook for the world’s recovery; but it is Friday’s US GDP figure that will truly establish the progress of the global economy. The consensus calls for a significant moderation of the nation’s contraction. However, whether we receive a positive or negative surprise (or no surprise at all), that is a long time to wait when market conditions seem to require an immediate resolution.

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