Fundamental Forecast for Japanese Yen: Neutral
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The Japanese Yen had a relatively strong week, finishing as the third best performer behind the Australian and New Zealand Dollars. Despite the major rally in risk on Friday, the Yen was able to outpace the US Dollar, which it gained some 0.78 percent against. Indeed, the week was looking better for the Yen ahead of Friday, with it becoming a widely accepted gesture (by this analyst included) that the Euro-zone Summit would yield few, if any, substantive measures to stem the crisis at its roots. And while we largely believe that this will be the case – that markets deem the Summit’s measures as ‘not enough’ – the combination of some clarity out of Europe, the end of the month, and the end of the quarter was enough to see the Yen dumped in favor of higher yielding currencies and risk-correlated assets.
Beyond the Summit, and moving on to some wild speculation ahead of the usual discussion of this week’s economic docket, price action today was eerily similar to the day the Euro-zone Summit concluded in October 2012. In fact, if November 30 is not considered, the Australian Dollar and the Euro had their strongest performance since that day – and then markets fell off thereafter into a spiral through the first three-and-a-half weeks of November.
Similarly, the supposed ‘pause’ in the crisis created an air of sentiment that risk-appetite would be plentiful, at least for a few days. And with the Yen weakening then as it did today, Bank of Japan officials stepped into the markets on October 31, 2011, to take the period of assumed ‘calm’ to weaken their currency. Even though it is a remote and largely unknown possibility, there is little reason to believe that an increasingly dovish BoJ wouldn’t do the same thing in the coming days.
With respect to that, we note that a BoJ Rate Decision is coming in the second week of July. Ahead of that meeting, however, there are a few pieces of data on the docket that might influence the BoJ when they convene. Largely speaking, there are two days that matter this week of the Japanese Yen in terms of scheduled event risk: Monday and Friday.
On Monday, the Tankan second quarter surveys are out, and they’re expected to show a diverging growth picture for the manufacturing and non-manufacturing sectors of the Japanese economy. While the Tankan Large Manufacturers Index is expected to remain on hold at -4, the Outlook is expected to fall to -4 from -3 in the first quarter, according to a Bloomberg News Survey. On the flip side, the Tankan Non-Manufacturing Index is forecasted to rise to 7 from 5, and the Outlook is forecasted to improve to 6 from 5. Overall, this should be modestly positive round of Tankan surveys, which could deter the BoJ from acting at its meeting the week after.
On Friday, two smaller releases are due, but they are noteworthy nonetheless. The preliminary May Coincident and Leading Indexes are due, and both are expected to show eroding views of the economy. The Coincident Index, a composite index of business cycle indicators, is forecasted to show a drop to 95.7 from 96.9 in April. Likewise, the Leading Index, a composite index of the twelve leading indicators of the Japanese economy, and is supposed to decline from 95.6 to 95.0.
Thus, what we see here is an expected mixed but skewed to the downside picture of the Japanese economy via the various data due this week. When considered in sum, they could prove to be enough to start speculation about the BoJ doing something more accommodative at their meeting next week. And while these are severely bearish considerations, we still believe the Euro-zone Summit’s results will prove feeble, so the Yen’s outlook is broadly neutral with the prospect of a major, quick shift to safety at any point in the near-future. –CV
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