Fundamental Forecast for Japanese Yen:Neutral

The Japanese Yen was the second worst performing major currency this past week, falling 3.06 percent against the U.S. Dollar. The Yen’s positioning among the major currencies is curious to say the least, in light of the intervention; the New Zealand Dollar performed even worse than the Yen did. Still, with another invention out of the way, one of many potential interventions given Japanese Finance Minister Jun Azumi’s comments, it appears that the Yen is poised for further strength in the coming weeks.

The biggest fundamental drawback to the Yen is how it fares against the U.S. Dollar. Clearly, Japanese monetary officials are paying close attention to how the Yen performs against the U.S. Dollar and not the other major currencies; while the Yen easily surpassed its pre-intervention levels against the Euro and the New Zealand Dollar this past week, it remained lower against the Greenback. It appears that it will take another sharp move higher against the world’s reserve currency for Japanese officials to intervene once more. However, a point of caution: the timing of this past week’s intervention, in light of recent global developments, is of no coincidence.

Ahead of the intervention, markets rallied sharply on news that Greece would write-down 50 percent of its debt and that more aid would head towards the indebted Southern European nation. With the USD/JPY under pressure over the past several months, the relief provided by the Euro-zone’s temporary measures provided an opportunity to intervene when market participants were least expecting it. In fact, it appears that the move was preemptive to say the least, in anticipation of another major bear move in the weeks ahead. With that said, the transition in the Greek government that is scheduled to occur over the next few days should boost investor confidence, perhaps setting stage not dissimilar to the one headed into last weekend.

On a strictly fundamental basis, there are two events on the docket that will be taken into consideration by Japanese officials when deciding whether or not to intervene on behalf of a weaker Yen once more. Trade balance data from September is due, which is expected to show a marked improvement from the prior month – a clear result of a weaker Yen following the August 4 intervention. Data going forward is unlikely to show the same improvement, as the Yen strengthened significantly between August 4 and October 31 (the most recent intervention).

The other event on the docket worth noting is the Eco Watchers survey, an index that tracks correspondents’ opinions of the current economic climate as well as their forecast going forward. The current portion of the survey, according to a Bloomberg News survey, suggests that economic conditions are worsening in Japan, albeit at a slower pace, with the index forecasted to show an uptick to 46.5 in October from 45.3 in September. This reading would remain below the July high of 52.6. While there is no forecast for the forward looking portion of the survey, the index has steadily deteriorated over the past several months. Using this as a guide, if Japanese companies believe that they’re heading towards hardship, this could be enough reason for either the Bank of Japan or the Ministry of Finance to intervene in the markets ahead of the next major sell-off in risk-correlated assets. –CV