Stock markets in Asia are seeing some added volatility as we start the week on Monday as market sentiment continues to be influenced by the stronger US dollar, which is now seen trading at a 4-1/2-year peak against the yen. These moves in the USD/JPY are coming as a result of significant changes in central bank policy from the bank of Japan and strengthening economic data in the US.
These moves will have a significant influence on a wide variety of markets, and with the USD/JPY now trading over the closely watched 100 level, expect the yen to continue in its bearish trend for the remainder of the summer. The Bank of Japan (BoJ) enacted many of these stimulus policies specifically to weaken the yen and support prospects for companies like Toyota (NYSE:TM), Honda (HMC) and Sony (NYSE:SNE). So, while this is a positive for Japanese exporters, this can also be viewed as a minor negative for foreign counterparts, in companies like Ford (NYSE:F), General Motors (GM), and in electronics manufacturers like Apple (NASDAQ:AAPL) and Hewlett-Packard (NYSE:HPQ).
Prospects for Currencies
Going forward, the psychological break in the USD/JPY above 100 signals a major shift in the prospects for both currencies and its related asset vehicles. Those looking to express these views in ETFs will see stronger prospects in funds like the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP), whereas funds like the PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN) and CurrencyShares Japanese Yen Trust (NYSEARCA:FXY) should be viewed as less preferable. When looking at Japanese stock markets, the wider view remains supportive. The BoJ is looking to reduce volatility in the Nikkei 225, enhancing prospects for the iShares MSCI Japan Index ETF (NYSEARCA:EWJ), which tracks the index.
Looking at the longer term charts in the USD/JPY, we can see that there is significant upside potential when basing forecasts on historical averages:
When looking at the prospects for the US dollar and the USD/JPY forex pair in particular, it is important to watch correlated assets, such as the S&P 500 (NYSEARCA:SPY) and gold (NYSEARCA:GLD). Upside in the US Dollar is generally accompanied by weakness in the S&P, so with this benchmark trading at elevated levels, it would not be surprising to start seeing downside corrections:
In gold, an alternative scenario is presenting itself, as strong downside momentum is suggestive of further weakness (another U.S. dollar positive):