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Japanese Yen Shows Signs of Faltering, Will BoJ Surprise?

The Japanese yen had it first losing week against the greenback in the last seven but failed to break from its prevailing long-term bullish trend. A stronger than expected U.S. Non-farm payroll report helped the dollar find a bid, as the 151,000 jobs generated more than doubled estimates of 60,000. The Fed’s announcement of a $600 billion asset purchase program sunk the dollar mid week, but markets were expecting the telegraphed move and most of its implications were already priced in the market. Thus, if we continue to see strong fundamentals from the world’s largest economy markets may start to price in the potential for a rise in U.S. inflation and future tightening which could be supportive for the reserve currency. Indeed, we have already seen Overnight index swaps go from giving a zero percent chance of a rate hike in January to 9.5% as the focus shifts to the next move for the FOMC. Meanwhile, risk appetite derived from QE2 and the labor report saw the Asian currency lose ground to the other major currencies and has several on the verge of a trend shifts.

 

Japanese policy makers didn’t follow their U.S. counterpart’s lead and add to their own quantitative easing efforts. The central bank held their target rate at 0.0% to 0.10%, while expanding the scope of the asset that will be bought with their existing $62 billion program to include real estate investment trusts. Although the move helped buoy Japanese equity markets it had little impact on yen valuation. It could be a matter of time before the monetary authority has to amplify their efforts as Yen strength continues to be a burden or Japanese exporters and is placing downward pressure on prices. Additionally, we can’t rule out a second round of intervention as current conditions could allow for a more meaningful impact than their initial efforts.

 

The upcoming economic calendar is expected to bring more bad news for the Japanese economy with consumer confidence, machine orders and producer prices all weaker from the month prior. We don’t expected any of the release to market moving as risk trends and dollar sentiment will continue to be the main drivers. Overall markets may quiet following the extreme volatility y that was seen this week and an overall light docket, which could provide the environment for a constructive move from the USD/JPY as the pair closed above its 20-Day SMA at 81.23 for the first time since September 22nd, making a bullish case for the pair.-

Disclosure: Long USD/JPY