Fundamental Forecast for Japanese Yen: Neutral

With next to nothing of note on the domestic calendar, risk sentiment is likely to take over Japanese yen price action. Indeed, the correlation between USDJPY and the VIX Index of S&P stock option volatility – investors’ standby “fear” gauge – finished last week at 0.72, the highest in nearly four years. This puts the spotlight on continued speculation about a second round of quantitative easing from the US Federal Reserve, the hopes for which have been the driving force behind the surge in risk appetite over recent weeks amid hopes that renewed stimulus will buttress the recovery in the world’s top economy and – by extension – the world at large.

Fed Chairman Ben Bernanke seemed decided on the need for further measures in a closely-watched speech on Friday, saying the central bank sees the case for “further action” and is ready to provide more accommodation with inflation rates too low, the risk of deflation “higher than desirable”, and the labor market recovery “painfully slow”. The Fed chief was vague on the details however, and the focus now heading into the FOMC monetary policy meeting on November 2 will be on how policymakers will approach renewed monetary stimulus and to what degree.

On balance, this means another busy week of policymaker chatter will drive risk sentiment, with continued optimism about a dovish turn at the Fed promising to stoke shares and weigh on the Yen. Indeed, with the market seemingly convinced that further QE is now a matter of “when” rather than “if”, economic data has become secondary to anything that sheds more light on the specifics. Taking top billing in the week ahead will be remarks the full hawk-to-dove spectrum of voting members on the rate-setting committee, starting with NY Fed President Bill Dudley, Board Member Elizabeth Duke, and the another brief outing from Bernanke. On Wednesday, the Fed will release their regional Beige Book survey, with speech-making set to resume on Thursday with St. Louis Fed President James Bullard. Finally, stalwart hawk Tom Hoenig closes out the week on Friday.

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