Fundamental Forecast for Japanese Yen: Bullish

- Japan’s Jobless Rate Unexpectedly Falls, Household Spending Surges
- Business Outlook Improves But Capital Investment Falls Most in 10 Years
- Housing Starts Fall Most in Two Years, Industrial Production as Expected

The Japanese Yen will begin the week ahead at a major trend-defining juncture, with the behavior of risk appetite likely to set the currency’s trajectory. Global equity markets slumped for the second consecutive week amid increasingly mixed economic data capped by September’s disappointing US jobs report. We have long said that the apparent onset of a rebound witnessed over recent months owed mostly to extraordinary expansionary policy measures (both fiscal and monetary) around the world as well as the inventory restocking cycle, arguing that stocks were overvalued at the highest levels relative to earnings since 2003 in a year when global economic growth is set to shrink in real terms for the first time in the post-WWII period. If we are indeed at the cusp of a sobering correction lower that leads stocks lower, the spectrum of risk-correlated investments (commodities, carry trades) are likely to follow, with the Japanese unit rising as traders unwind short-Yen yield-seeking positions. Such an outcome would be tremendously significant from a technical perspective with prices testing major resistance established in January as the worst of the panic that gripped capital markets late last year began to recede. A break below this juncture would open the door for the currency to rise to levels unseen in well over a decade, threatening to send USDJPY below the 80.00 mark for the first time since 1995.

The economic calendar is fairly tame compared to last week’s overload of significant releases. The preliminary estimate of Augusts’ Leading Index are expected to show the metric rose for the sixth consecutive month, pointing to continued moderation in economic growth in the coming 6-9 months from the lows registered in the first quarter. On balance, much of this has already been priced into the exchange rate and is unlikely to produce a significant response from the market, with traders much more sensitive to negative news after seven months of buoyant confidence. The Current Account surplus is set to narrow to 1148.0 billion yen in August from 1265.6 billion in the previous month as exports continue to tumble on lackluster foreign demand. Indeed, last week’s Tankan survey of large manufacturers (who primarily cater to the overseas buyers) revealed firms expect sales to fall -10.5% through the 2009 fiscal year (12 months ending April 2010), more than doubling the drop in FY2008.

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