Yen At A Crossroads: When Monetary Policy Runs Dry Market Sentiment Rules

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Includes: FXY, JYN, YCL, YCS
by: Brandon Becker

Summary

Japan is running out of monetary policy actions.

The Japanese Yen may soon be left to the wills of the market.

Market sentiment indicates a reversal to the Yen’s bullish run.

Sentiment data indicates that the Japanese Yen (JPY) may not remain on its bullish run. The consensus media sentiment may yet weigh on the currency.

In researching drivers of the Japanese Yen, it turns out that media references to the future direction of the Yen/USD have been surprisingly accurate over the past decade.

In order to measure the media consensus forecast for the currency we use the Thomson Reuters Market Indices (TRMI). The TRMI are the world's most comprehensive finance-specific sentiment data. The TRMI data is produced by quantifying references to tradeable assets across thousands of news and social media articles obtained in real-time. Emotions (optimism, confusion, urgency, etc.) and financial topics (price forecasts, earnings forecasts, etc.) in the media are quantified and converted into time series. Coverage of 130 countries, 32 currencies, 35 commodities, 52 equity indexes, and over 8,000 global equities is published in the TRMI data feeds. When currencies are analyzed, only the references to the primary currency in a pair are quantified. The TRMI data is used by large hedge funds and banks for the augmentation of trading strategies, research, risk management, and macroeconomic forecasting.

Our new and forthcoming book, Trading on Sentiment: The Power of Minds Over Markets (Wiley, 2016), explains in greater detail how media sentiment can be quantified and traded on.

For the Japanese Yen, the TRMI priceForecast has historically shown predictive value when the 200-day and 500-day moving averages cross. The priceForecast TRMI is calculated as the net difference between all predictions of the Yen rising in value versus all projections of the value declining. When the daily balance of positive versus negative directional forecasts is averaged out, it may be charted to create a visualization of market expectations. A recent cross in these averages implies that the recent Yen/USD rally may not last.

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In early February 2016 the BOJ's quantitative easing program and negative interest rates did not hit the Yen's value as intended, and appreciation ensued. In a similar situation back in 2003, the BOJ heavily purchased U.S. treasuries to push the Yen lower. Following the recent G20 accord prohibiting central banks using monetary policy to shift exchange rates, such a move would be seen as starting a currency war.

It appears that Abenomics, the nickname given to Japan's prime minister's economic policies, is proving powerless to revive the Japanese economy. With interest rates already negative, the BOJ arsenal for economic stimulus has run dry. The Yen may now be more susceptible to the will of the markets. And with negative market sentiment indicating a depreciative forecast on the Yen, it would be wise to proceed with caution. The Yen's bullish run may soon reverse.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.