Japanese Yen May Give Back Gains As Fears Subside

Fundamental Forecast for Japanese Yen: Bearish

- First quarter GDP rose 1.2% missing expectations for a 1.4% improvement
- The Tertiary Index fell 3.0% doubling expectations and reaching the lowest level in a year
- Machine orders rose 6.3% in March surpassing estimates of 5.4%

The Japanese Yen gained from 300 to a 1000 pips against most currencies on the week as risk aversion gripped broader markets as concerns grew that the issues in Europe could weigh on global growth. The commodity dollars were hit the most as high yielder’s like the Australian and New Zealand dollars were sunk by the unwinding of the carry trade. The Asian currency gave back some of its gains to end the weak as fears began to subside which could carry over into the upcoming week, if markets deemed the panic as overdone. However, there still remains enough concern that any bullish sentiment may be limited and with a light global economic calendar broader trends could prevail.

The BoJ raised its outlook for the economy following their monetary policy meeting where they left rates unchanged at 0.10%. The central bank cited signs of sustained recovery in domestic demand for its improving perspective, but also warned that Europe's debt crisis posed a risk to the global economy. "We need to watch for downside risks for the European economy if financial market tensions heighten due to some European countries' fiscal reform," Governor Masaaki Shirakawa said. Policy makers also announced a plan to encourage lending targeted at growth industries and suggested it may be willing to do more to support economic recovery by accepting a broader range of collateral for BOJ operations.

The Japanese economic calendar is full of significant gauges for the economy but none will probably be market moving. The most important release could be the upcoming consumer price index as deflation remains the central bank’s main concern. Forecasts are for inflation to have decelerated by 1.4% from 1.2% the month prior and given the 3.0% decline in the GDP deflator it appears that price growth remains in the distance. Despite the sharp declines on the week the USD/JPY didn’t drop below the “flash crash” low of 88.12 which could still be tested as it was in other yen crosses. The yen could come under pressure if fundamental releases from the largest economies continue to improve providing evidence that the global recovery is sustaining. Broader strength will ease concerns over the expected weakness in the Euro-zone and could see risk appetite re-emerge.

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