Fundamental Forecast for Japanese Yen: Neutral

Direction from the Japanese yen is often the product of risk appetite; and the fundamental outlook for next week doesn’t suggest this essential correlation will break any time soon. However, this connection may actually complicate the future for speculators rather than make it more straightforward. The primary source of what has essentially been a market-wide advance in risk appetite these past two weeks seems to have petered out. Earnings releases are in decline and there are very few individual releases on the docket that can initiate a global shift in sentiment on its own. Among other potential catalysts – like growth speculation – there are many contingencies and shades of gray that could make the yen a very difficult currency to trade going forward.

Japanese Yen Forecast to Rally Further vs US Dollar

USDJPY – Our contrarian forex trading strategies have remained short the USDJPY on one-sided sentiment extremes, but a more recent shift makes short-term outlook somewhat less clear. The ratio of long to short positions in the USDJPY stands at 2.04 as nearly 67% of traders are long. Though a ratio of over 2:1 is clearly extreme, this is a fairly significant shift from last week when the ratio stood above 3:1. Said change in direction has meant that one SSI-based strategy has actually gone long the USDJPY while another remains short. We remain bearish on fairly one-sided crowd sentiment, but short-term moves dilute our forecast for declines.

US Dollar, Japanese Yen on Edge of Bearish Breakouts as Risk Appetite Rises

US Dollar, Japanese Yen on Edge of Bearish Breakouts as Risk Appetite Rises
• Euro: Germany Officials Suggest Economy at the Forefront of the Global Recovery
• British Pound Bolstered by Risk Appetite, Housing Data
• Canadian Dollar Backs off its Rally Just Ahead of the BoC’s Rate Decision

US Dollar, Japanese Yen on Edge of Bearish Breakouts as Risk Appetite Rises
The benchmark dollar plunged against all its major counterparts Monday as the market found a catalyst for risk appetite in what could be a temporary solution to US-based commercial lender CIT’s impending debt default and bankruptcy. Indeed, we can see that most currencies (and asset classes for that matter) responded to the shift in optimism as would be expected. The Japanese yen was down against every one of its major counterparts except the US dollar which it consequently marked a modest 0.01 percent gain against. This shift in risk appetite is tangible; but the true break has not yet been confirmed. In the FX world, we see EURUSD has pushed through 1.4175; but June’s highs of 1.4330 still stand. At the same time, the Dow has advanced for its sixth consecutive session; yet the benchmark is still conspicuously below the six-month highs set early last month. Momentum is still on the bulls’ side; but a catalyst will be needed to take it to that next, psychological step.

It should not be hard to qualify a true break out against the US dollar and perhaps even the development of a significant bear trend. This is specifically the case because the currency is at present clearly linked to risk trends. Therefore, should the greenback merely break lower on only a few pairs without confirmation from its less, risk-sensitive crosses or from other markets; it is likely a speculative move that could quickly fade into a reversal. In looking for the fuel for optimism, we should look to the same sources that have brought us to this point. First things first, fear that CIT could still go under is a significant hurdle for financial markets. Since the Treasury rebuffed the firm for a second round of bailout money last week, bondholders have been working on a rescue of their own that could total $3 billion. It has been estimated that this firm has $10 billion in maturing debt over the coming year; but for risk appetite, only the immediate stability of the financial system is a concern. To upgrade from a passive to active advance in risk sentiment, the earnings calendar could once again step in for drive. Among the companies expected to report tomorrow are Regions Financial Corp (one of the 19 Stress Test banks), Caterpillar, DuPont, Merck, United Technologies, Coca-Cola and Apple. Most of these are blue chips and therefore important; but we may need consistency and surprises to revive such an all-encompassing trend.

As for data, the US docket is relatively light. Today, all dollar traders had to work with was the leading indicators composite index for June. While this indicator has shown some predictive abilities in the past, it is still has little impact on price action. It should be noted, however, that the 0.7 percent pickup through June marked the first time we have seen three consecutive improvements from this series since the second quarter of 2004. Looking ahead to tomorrow, Fed Chairman Bernanke’s monetary policy report to the House could bring speculation to life. Last week’s Fed minutes offered economic forecasts that projected a sharp reduction in the pace of recession through the second quarter (an important reading with the official GDP numbers due next week) and the first cautious steps towards rolling back financial aid. As the global economy progresses in its recovery, market participants will become more discriminating as to which economies are leading and which are lagging the turn around. The market will no doubt scan his comments and answers with a fine-toothed comb to discover a fundamental bias.

Related Article: Dollar May Soon be Forced into a Breakout, Risk Appetite Torn Between Earnings and Credit Fears
 

Euro: Germany Officials Suggest Economy at the Forefront of the Global Recovery
Europe’s largest economy is on track to see a sharp reversal in economic activity and is not in the position to require banks to increase capital levels – according to German officials, that is. The market has been treating the euro as the leader of the economic recovery among the majors through the actions of Euro Zone policy makers. With the ECB putting a stopper in interest rate cuts at 1.00 percent, credit markets responding positively to the covered bond purchasing program it implementation and certain finance ministers signaling their intentions to start reducing deficits soon ahead of their counterparts; all the components seem to be in place for confirmation from objective data of positive growth. More than three weeks before the official data hits the wires, the Bundebank reported in its monthly bulletin that the German economy contracted “only slightly” in the three months through June after seeing a record contraction in the first quarter. There is no official consensus among economists as to the hard number due August 13t; but their forecasts are already outpacing the IMF’s projections. Another notable German report was released by the Finance Ministry in which the group dismissed a report ran in a local newspaper suggesting the government is mulling over a forced capitalization plan that is reminiscent of the US Stress Test to prevent a credit crisis later in the year.
 

British Pound Bolstered by Risk Appetite, Housing Data
In a global economic recovery, which of the majors stands to reap the most benefit? It could be argued that exporters would find more demand while financially dependent economies can work down deficits. However, if the United Kingdom were to begin a recovery from its worst recession and financial crunch since WWII, the country could shed the IMF’s forecasts that it is on pace to be the worst performing economy in the industrialized world and potentially start working down the excessive levels of government and private debt that still plague the country. The steady improvement in housing prices as reported by the Rightmove index keeps this trend going; but real confirmation will come with Friday’s 2Q GDP number approaches. This indicator is no doubt the most market-moving even this week, so speculation will only intensify with time.

Canadian Dollar Backs off its Rally Just Ahead of the BoC’s Rate Decision
Reports showing a smaller than expected contraction in wholesale sales (0.3 percent) and the largest monthly influx of investment capital in five years (C$18.9 billion) provided a boost to the loonie this morning. However, the market would not be able to maintain this pace later into the session as traders started to batten down the hatches for tomorrow’s BoC rate decision. There is nowhere to further cut rates; but policy officials have been exceedingly bearish in recent months. Look for elaboration on the last meeting’s determination that Canada’s recession is as bad as the one in the United States; but real forecasts and policy will likely be held until Thursday when the quarterly Monetary Policy Report is due.

The Japanese currency lost ground across the board in early Asian trading on Monday.

The yen drifted lower to 129.57 against the euro, 92.69 versus the US dollar, 150.23 against the pound and 85.57 against the Swiss franc by 8:00 pm ET and this may be compared to Friday’s closing values of 128.99, 92.48, 149.97 and 85.28, respectively.

The Japanese unit also slipped to 58.34 against the New Zealand dollar, 79.94 versus the Canadian dollar and 72.46 versus the Australian dollar by 8:05 pm. The yen closed last week’s deals at 58.03 against the kiwi, 79.49 versus the loonie and 72.03 against the aussie.

US Dollar, Japanese Yen Gain as Markets Remain Uneasy, US Consumer Confidence Falls

The US dollar and Japanese yen made headway once again on Friday as risk appetite remained uneasy. There were a variety of US economic releases, which offered mixed results. First, the US trade deficit unexpectedly narrowed to $25.962 billion during May thanks to a 0.6 percent drop in imports and a 1.6 percent rise in exports as the US dollar plunged. Meanwhile, import prices rose for the fourth straight month in June at a rate of 3.2 percent, which was the single biggest monthly increase since November 2007. However, deflation concerns weren’t completely pushed aside as the year-over-year rate of import price growth remained near the record low of -17.5 percent at -17.4 percent. Finally, the Reuters/University of Michigan consumer confidence index unexpectedly dove down to 64.6 in July from 70.8, with a breakdown of the report showing that sentiment soured on both current conditions and the economic outlook.

Looking ahead to next week, the Commerce Department is forecasted to report on Tuesday that US retail sales rose 0.4 percent in June, which would mark the second straight improvement, and excluding autos, retail sales are anticipated to increase by 0.5 percent. However, there is potential for a worse-than-expected result, as the International Council of Shopping Centers (ICSC) said that same-store sales tumbled 5.1 percent in June from a year earlier, which was the sharpest decline since March.

The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on June 24. Following that meeting, the markets saw no surprises from the Federal Open Market Committee (FOMC), as they left the fed funds target range at 0.0 percent - 0.25 percent and made no changes to their quantitative easing (QE) program. The status of QE is high on the minds of traders, so the comments contained within the minutes will be scoured for indications that they will increase their purchases of Treasuries, and if they are found, the US dollar could fall sharply.

Euro, British Pound Fall, But EUR/USD and GBP/USD Hold to Trading Ranges
The euro and British pound took a hit on Friday, but from a longer-term perspective, pairs like EURUSD and GBPUSD remain range bound and we have yet to see any sort of directional break, which differs significantly from the JPY crosses that have broken lower. UK economic data highlighted the deflationary risks plaguing the nation as the UK producer output price index fell by 1.2 percent in June from a year earlier, the most since 2001, while producer input prices plunged 11 percent during the same period, the sharpest drop since 1997.

The data suggests that next Tuesday’s release of the UK consumer price index will also reflect lessening price pressures for the month of June. Indeed, the annual rate of CPI growth is forecasted to fall to a nearly two-year low of 1.8 percent from 2.2 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further in August. On the other hand, if CPI holds strong, the currency could rally in response.

Canadian Dollar Mixed as Employment Fall Less Than Expected, Trade Deficit Widens
The Canadian dollar was the third strongest of the majors, trailing behind the US dollar and Japanese yen, as Canadian economic data was a bit better than expected. The net employment change for the month of June fell by 7,400, but this was much better than forecasts, which had called for a drop of 35,000. Likewise, the unemployment rate rose less than anticipated, but still hit a nine-year high of 8.6 percent. A breakdown of the report shows that any improvements were due to increasing employment via part-time jobs or self-employment, neither of which bode well for increased consumption down the line. Meanwhile, Canada’s merchandise trade balance fell to -$C1.421 billion in May as exports to the US fell to the lowest since October 1997.

Next Friday, headline CPI for June is projected to fall to an annual rate of -0.3 percent, while the BOC’s core measure is projected to hold fairly steady at 1.9 percent, down from 2.0 percent. Ultimately, the data will likely show that the bulk of price declines is due purely to falling commodity costs, and as long as the core measures don’t fall sharply, the Canadian dollar shouldn’t react too strongly. However, if broader price pressures start to fall more steeply, concerns about deflation may arise and weigh on the currency.

Swiss Franc Still Range Bound - SNB Intervention Risk Looms
EUR/CHF remains within an intraday falling channel formation, with support now at 1.5110 and resistance at 1.5200. This pair is important to watch as the Swiss National Bank (SNB) has cited the appreciation of the Swiss franc against the euro as a risk for deflation, and has physically intervened in the currency markets within the past two weeks. Also, last Thursday, SNB directorate member Thomas Jordan said that they “continue to consider interventions to prevent an excessive rise in the Swiss franc.” As a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.

The S&P/ASX200 closed higher by over 2.2% yesterday, while overnight on Wall Street the Dow Jones Industrial Average edged lower by 24 points. In Europe the FTSE100 gained 0.73%.

The price of gold in Australian dollars is trading at $1,1192.46, while in US Dollars it trading at $956.47.

The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8015, and JPY78.76.

Further strength for Crude oil overnight, closing at USD$71.42.

Currency traders like to say that currencies are always in a “bull market.” That’s partially true. What’s closer to the truth is you can always find at least one currency that’s outperforming the stock, commodity and bond markets at any given time.

For example, over the past weekend Lehman’s, AIG’s and Merrill Lynch’s troubles took a bite out of the dollar’s performance. But while the dollar dipped, two currencies continued to rise - including the Japanese yen and Swiss franc.

This is pretty typical of currencies during this type of market…

Traditionally, there are currencies that prosper during tough times, even during recessions and depressions. These “recessionary” currencies are beaten down during recovery periods.

Traders scorn these currencies when other markets are soaring because no one wants their “paltry interest” and smaller growth, when they can get higher returns elsewhere.

However, when markets start to fall, currency traders grab these currencies with both hands to save their portfolios. That’s exactly what happened this weekend. The so-called “weakest currencies” paying paltry interest rose, while the high-yielding currencies like the Australian and New Zealand dollar sank

To recap: During stock bull markets, currency investors are busy buying up high-yielding currencies and continually selling low interest yielding currencies. But when bad times hit, currency investors quickly trade in their high-yielding currencies for the safety of the ‘beaten-down dog’ currencies like the Japanese yen and Swiss franc.

In the midst of all of this market turmoil, our old friend during risky markets - the Japanese yen - is still rising. You can pair this gem with almost any currency in the world right now - especially the British pound.

The Japanese yen has been beating out every single one of the top 16 or so currencies. So this is the biggest place that money is running to right now.

Why is this happening? It’s not that Japan’s economy is so strong. In fact, Japan may be entering into a recession as we speak. So what’s going on? In the past, as stock markets grew strong and volatility stayed out of the markets, investors around the world bought high-yielding currencies with borrowed money in the lowest yielding currency in the world, the Japanese yen (0.5%).

Many of these currencies reaped 6-8% a year. As an investor, all you had to do was pay between zero and one half of 1% if you borrowed yen. When you add a bit of leverage to these positions, you reap even greater returns just by borrowing low and reinvesting those funds. This strategy worked for years during calm, cool, and collected financial markets.

However, as we know…since about a year ago, the markets have taken a turn for the worse. We’re now in a high-risk, volatile market. That’s obviously not conducive to this type of currency investing called “carry trading.”

So as these positions are closed out (or as they say in the industry - unwound), they sell the higher yielding currency like Aussie or New Zealand dollars or like the euro or pound and have to pay back that loan of yen. When they do this, they are “buying back” yen which causes the yen to pop up.

It’s almost like a short-seller in stocks covering his short-sell by buying back the shares to close the position out.
Long story, short: As long as the turmoil lasts, the yen will prosper. Traders will continue to unwind positions as many are either margin-called or flat-out scared out of their positions.

The most important part of investing is to clearly understand what you’re investing in. In the currency world, most currency traders will talk about the “seven” majors.

The seven majors are the currencies that are traded most often on major brokerage desks around the world. The seven majors are generally paired with the dollar, so technically, the U.S. dollar would count as the eighth “major.”
Here’s a quick 30 second introduction to each of the major currencies…

U.S. Dollar (USD): The majority of trades in the Forex market involve the U.S. dollar against a different currency because it is currently used as the world’s reserve currency.

Euro (EUR): This is the new kid of the currency majors. Lately, the euro has been stepping up to take its place as a reference currency, as well as a larger component of foreign reserves by banks. It is also known as the anti-dollar because the euro tends to appreciate as the dollar depreciates.

Japanese Yen (JPY): The yen has been known as the carry-trade currency because for years, investors have borrowed yen to fund their carry-trades. Because Japan imports all of its oil, when crude oil prices begin to climb this hurts its economy and greatly impacts the value of the yen.

Swiss Franc (CHF): Also known as Swissie, it is sometimes called a ‘safe heaven,’ due to Switzerland’s independent stance, economy isolation, and strong private banking system. This in turn has made their currency very neutral.

The British pound (GBP): Frequently called, Cable or Sterling, the pound first got these nicknames because it was the first currency the Forex market traded through ‘cables’ across the Atlantic. The pound is the fourth most traded currency on the market and Great Britain’s economy is one of the strongest in Europe.

Canadian dollar (CAD): This currency’s unusual nickname, the Loonie, comes from the coins appearance which features a loon, a common Canadian bird, on the coins backside. Canada is a resource-focused economy, so the price of oil drives this currency along with commodities.

Australian dollar (AUD): Known as the Aussie, this currency is popular in the Forex market because of Australia’s currently high interest rates and generally stable economy. The Australian dollar is greatly influenced and driven by gold prices.

New Zealand dollar (NZD): Also known as the “kiwi,” the New Zealand dollar traditionally tracks the Aussie dollar’s path because these economies are tied together through exports. However, sometimes the New Zealand can fall while the Aussie dollar rises as we have recently witnessed.