Fundamental Forecast for Japanese Yen: Bullish

- Yen Falls as Bank of Japan Holds Rates, Reinforces Dovish Bias
- Japan’s Current Account Hints Yen to Trend Lower Against US Dollar

The Japanese Yen is likely to see the return of risk sentiment as the dominant driver of price action as the first-quarter round of corporate earnings reports overshadows a decidedly uneventful economic calendar.

The Yen’s sensitivity to the trends in investors’ appetite for risky assets has considerably increased over recent weeks. Indeed, the 21-day inverse correlation between the Japanese unit’s average value against a trade-weighted basket of its top counterparts and the MSCI World Stock index now registers at a solid -0.79, up from a negligible -0.1 four weeks ago. This suggests the currency will fill its familiar anti-risk role next week as companies across the size and industry spectrum report earnings for the first quarter of the year, rising with Wall Street’s down days and falling on its rallies.

The markets’ approach to next week’s earnings calendar promises to be a sober one, with investors sizing up companies’ profits against a backdrop of fading stimulus of both the fiscal and monetary variety. Indeed, the boost from older government support is fading and rampant concerns about bulging deficits are likely to see politicians withhold further assistance. Meanwhile, most central banks (Japan excluded) have either started to remove accommodative policy or shifted to a neutral posture in anticipation of doing so. This means the world economy must now begin to rely on private demand to prolong the economy, suggesting that encouraging headline earnings figures absent robust revenue growth are unlikely to impress as they did in 2009.

The path of developments in Greece and the looming election in the UK also present potent reasons for volatility in risk sentiment and the Yen. Traders pared bets against the debt-ridden southern European nation on Friday, with Greek CDS spreads pulling back from a record high while the spread between Greek and German 10-year bond yields narrowing by the most in six weeks, on the back of encouraging comments from EU officials. The situation remains highly unstable however and any boost achieved through rhetoric is likely to prove temporary until something concrete is finally in place. As for the UK, markets have seemingly become acutely sensitive to every opinion poll ahead of the March 6 electoral contest, with the fiscal health of the economy in the balance as the deficit-hawk Conservatives square off against the ruling Labour party, whose sitting PM Gordon Brown would rather delay trimming the debt until the economy shows greater vigor.

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