Fundamental Forecast for the Japanese Yen: Bearish

The Japanese yen was flat on the week against the dollar but saw sharp declines against the euro and pound. The single currency gained over 3% against the Asian currency impart due to actions from Finance minister Yoshihiko Noda. The Japanese official stated that it was appropriate to buy bonds from Ireland which followed a similar vote of confidence from China. The apparent global support for the region’s debt helped ease concerns over the debt crisis and helped deliver successful auctions from Portugal, Spain and Italy. Rising interest rate expectations in the U.K. and Euro-zone also weighed on the Yen against its European counterparts. However, declining yield expectations in the U.S. kept the greenback from gaining ground as last week’s disappointing labor report was followed by misses in retail sales and consumer confidence.

Improving domestic fundamentals failed to generate volatility but dimmed the prospect of more BoJ intervention which opens the door for Yen strength. A rise in whole sales prices to 1.2% should ease deflation concerns for policy makers which are expected to lift growth forecasts at their upcoming meeting. A rise in import cost for raw materials and energy are helping offset Yen strength which led to Japan’s current account surplus shrank for the first time in three months in November. The news isn’t all good as exporters continue to see demand wane on the back of persistent Yen support. An improvement in the Eco watcher’s survey for the second consecutive month reflects an improving domestic economy as the current conditions gauge rose to 45.1 from 43.6 in November.

The improving economy is expected to have brightened the outlook in Japanese households with the consumer confidence metric forecasted to rise to 41.6 from 40.4. Industrial production, machine tool orders and nationwide Dept store sales will also cross the wires but traders shouldn’t expect significant volatility from the domestic economic docket. U.S. yields continue to have a major influence on the USD/JPY which puts the focus on earnings season. Next week we will see a number of blue chip names report which could impact risk appetite and demand for bonds. If companies continue to show the ability to improve their bottom line then we could see broad based yen weakness. However, mixed results will leave price action to the prevailing broader themes of European debt and U.S. growth which should lose some focus next week but have the potential to generate support for the funding currency if confidence in either deteriorates.

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