The yen came into favor as risk aversion re-emerged on the back of concerns over the European banking system and Greek credit default swaps rising to a record high.
Fundamental Forecast for the Japanese Yen: Neutral
- Japanese Consumer Prices -0.9% versus -1.3% easing deflation concerns
- Yen finds support as risk aversion re-emerges
- Retail traders continue to favor dollar over yen, increasing downside risks
The yen came into favor as risk aversion re-emerged on the back of concerns over the European banking system and Greek credit default swaps rising to a record high. The Asian currency started the week on a weak note as China announced that it was unpegging the Yuan from the dollar which was viewed as a vote of confidence for the global economy sprung risk appetite. Comments from ECB member Noyer that banks have begun to hoard cash as they fear an ultimate Greek default, raised the anxiety level for traders as they had visions of the credit crisis, which initiated the flight to safety. The Euro fell for five straight days against the yen before a bout of risk appetite to close trading on the week provided enough support to end the streak. The dilution of a U.S. financial reform bill help spark a rally in stocks which led the yen to give back some of its gains against most currencies, but the overall outlook for growth has begun to dim which could remain a supportive factor for the funding currency.
The yen could extend its gains if the Group of 20 fails this weekend to agree on how to tackle Europe’s debt crisis, fueling another flight to safety. G-20 leaders will meet in Toronto June 25-27 to discuss policies aimed at addressing Europe’s crisis, spurring global growth and overhauling financial regulation. Germany and the U.S. have been at odds on whether debt reduction or stimulus should take precedence, with Chancellor Angela Merkel this week saying Europe’s debt levels have to be lowered because they are one of the main causes of the crisis.
The Japanese economic calendar is full of important releases but none may have market moving potential which is typically the case as the currency is nearly exclusively driven by risk sentiment. The Tanakan large manufacturers index garner the most attention as the indicator is used by investors as a gauge of the broader economy. The expected rise to -3 from -14 would be the highest reading since September, 2008 which could spark a rally in Japanese stocks which would add to the demand for yen. Expected increases in household spending and retail sales will add to the improving domestic picture. However, a flat industrial production reading could raise concerns that foreign demand is waning which would be detrimental for the export driven economy.
After the recent rally several yen crosses are testing significant support levels which could make further gains difficult. The USD/JPY could find support at 89.00; the pair has closed below the psychological level only a handful of times on the year, which were followed by reversals increasing its validity. We are also seeing possible trend line support near 89.00 drawn by connecting the 11/27 and 5/6 lows. Meanwhile, the EURJPY continues to see 110 hold as support with the GBP/JPY seeing downside risks limited by the 20-Day SMA at 133.99. However, a break of the levels could lead to extended gains for the yen.
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