Fundamental Forecast for the Japanese Yen: Bearish

US Treasury bond yields remain the top driver of Japanese yen price action, with the inverse correlation between a trade-weighted index of the currency’s average value against its top counterparts and the return on the 2-year note now at -0.6 – the strongest in two and a half months – on 20-day percent change studies. It is no wonder then that the Yen dropped sharply through November, sliding 1.2 percent, after 2-year yields rose for the first in eight months over the same period.

The recovery in US yields has come on the heels of the Federal Reserve’s announcement of renewed quantitative easing (QE) in early November. Expectations of additional Fed stimulus began to swirl mid-year, pushing yields to a record low by the beginning of last month. When Ben Bernanke and company finally took the plunge, they announced a program that largely mirrored expectations that had been priced in over the preceding months, robbing QE-linked trades of the impetus to extend established trends and opening the door for profit-taking. To date, yields have retraced less than a quarter of the selloff since April, hinting that the correction has further to go from here and pointing toward Japanese Yen losses.

On the economic data front the final revision of third-quarter Gross Domestic Product figures takes top billing, with expectations calling for a slight upgrade to show the economy added 1 percent in the three months through September, topping the initially reported 0.9 increase. October’s Machine Orders report and the fourth-quarter BSI Large Manufacturer’s Survey are also of note.

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