Fundamental Forecast for Japanese Yen: Bearish

The Japanese yen ended the week virtually unchanged against the dollar despite seeing extreme volatility on speculation surrounding the size of the Fed’s expected quantitative easing efforts. Concerns to start the week that U.S. policy makers would only dip their toe in the pool of QE sparked greenback support, until rumors swirled that the central bank had already outlined a $500 billion Treasury purchase program to be executed over six months. The USD/JPY would reach the lowest level outside of its all time low of 79.70 on the back of broad based dollar selling. Rhetoric from several FOMC members helped the reserve currency recoup losses, as they expressed concerns that new measures would have a limited impact. The most outspoken was noted hawk Charles Plosser, who isn’t convinced that it would do much for unemployment and wouldn’t change his outlook until stronger signs of deflation emerged.

Comments from Japanese Finance Minister Yoshihiko Noda that the government is prepared to take bold action including intervention to stem yen strength led to a bearish yen spike that was quickly retraced. Against most major currencies the yen managed to extend its gains as bulls were undeterred as there was little fear that the BoJ would take any action ahead of the G-20 meeting. An unexpected rate hike from the People’s Bank of China in an effort to slow their over heating domestic economy dimmed the outlook for global growth and helped drive the flight to safety.

The lack of an accord at the summit could open the door for Japanese policy makers to take action at their upcoming rate decision. However, another intervention could come beforehand as the central bank will look for the element of surprise. Non action from policy makers will put the focus on the inflation report as signs of increasing deflation will put additional pressure on the government to take action. Early forecasts are for an improvement to -0.6% from -0.9% the month prior which would provide a small window for an assessment of the impact of recent action. Ultimately, we expect the G-20 to be non-eventful and although the odds are strong for action from Japanese policy makers, an immediate response would be deemed aggressive. Therefore, look for yen direction to be dictated by risk sentiment, so traders should take their cue from the earnings calendar and key fundamental releases including U.S. 3Q GDP.

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