Japanese Yen Looks To US Data, EU Leaders’ Summit For Direction
By Ilya Spivak, Currency Strategist
Fundamental Forecast for Japanese Yen: Mixed
- Holding Short Yen Position as Prices Hit First Target
- Speculative Sentiment May be Warning of USDJPY Turn
The Japanese Yen sits at the cross-currents of major themes driving financial markets in the week ahead. The currency’s benchmark pairing against the US Dollar continues to show a strong correlation with 10-year US Treasury yields (on 20-day percent change studies). Meanwhile, the crosses continue to track closely with risk sentiment trends, as tracked by the MSCI World Stock Index. This exposes the Japanese unit to the evolving threat of structural instability posed by the lingering Eurozone debt crisis as well as strengthening headwinds facing global economic performance.
On the growth front, the focus remains on the United States. The Eurozone is widely expected to have entered recession at this point, and leading economic data certainly seems to support that view. That has translated into a slowdown in Asia, which depends on Western Europe for a large chunk of export demand. That pins investors’ hopes on the US and the ability of a fragile and uneven recovery to offset the malaise elsewhere. This puts the spotlight on the June set of survey data as the timeliest gauge of activity in the world’s top economy.
Manufacturing activity surveys from the Dallas, Richmond and Kansas City Fed branches are due to cross the wires next week, with mixed results expected. The Chicago PMI and Consumer Confidence readings are also on tap. With the Fed opting not to re-launch quantitative easing at last week’s FOMC meeting, soft outcomes threaten to spark risk aversion and send Yen crosses lower along with stock prices. USDJPY is likewise vulnerable in the event that haven demand buoys Treasury bond prices and sinks yields, but fading QE3 hopes and a parallel pickup in safety-seeking flows into the US Dollar are likely to see the pair relatively better insulated from Yen strength than elsewhere.
Sentiment can likewise falter if Eurozone officials’ efforts to rein in the debt crisis and boost growth once again disappoint financial markets. Event risk heats up toward the end of the week as EU leaders hold a two day summit while the German Parliament holds a vote on the fiscal compact treaty. Global leaders put heavy pressure on their European counterparts to step things up at last week’s G20 sit-down. With that in mind, traders will look for operational details of new policies to emerge from the summit. Possible initiatives include a banking union based on a region-wide deposit insurance scheme. Details of a €125 billion growth-boosting effort announced after German, Italian, French and Spanish heads of state met in Rome on Friday will also be sought.