Traditionally March is a month where the closing of large institutional carry trade positions and the domestic repatriation of foreign assets into Yen at the end of the fiscal year drives the USDJPY lower. However, volatility driven by an array of differing global issues has seen the USDJPY up around four Yen from where it started the month.
Fundamental Analysis
From a fiscal and monetary policy standpoint not much has changed. Chairman Shirakawa and the Bank of Japan (BoJ) are as dovish on interest rates as ever, and their effectively zero-percent benchmark level is all but guaranteed until the end of 2010. With domestic demand struggling and demand for exports up only marginally, Japan’s recovery from this most recent global recession remains on thin ice – and in the near term, is likely to continue that way. In fact, at its March 17th policy meeting, the BoJ expanded its three-month credit facility from ten-trillion Yen to 20 trillion in another bid to stimulate Japan’s floundering economic engine. However, the already-high levels of domestically oriented government stimulus will dampen the effects of further credit expansions. A large portion of Japan’s ability to generate sustainable growth hinges on exports (and thus the Yen); however, the factors contributing to the value of the Yen remain largely outside of Japan’s control. Currently the primary issues influencing the Yen are the US Federal Reserve interest rate schedule and confidence in the Euro.
As the recovery in the United States begins to dig in, the spectre of increasing interest rates from the Fed has begun to alleviate some of the pressure on the Yen. With Bernanke likely to increases rates before Shirakawa, the appeal of using the Greenback as a substitute for the Yen in the raising of cheap capital diminishes – and this substitution was one of the original contributors to the Yen’s recent epic rally. As mentioned earlier, March generally sees the USDJPY trade lower as the fiscal year draws to a close. However, investors abandoning the USD to enter into new Yen-funded carry trades, and the on-again, off-again appetite for risk has neutralized the effects of repatriation flows and old JPY-funded carry trade close-outs (of which there were a relatively smaller proportion due to the USD being used as a substitute) for much of the month, even reversing their effects near the end. Expectations for the weeks ahead are that the Yen will continue to experience price volatility in a fairly wide range as the conflicting symptoms of various global issues work their way through the markets.
While the current USDJPY levels are a pleasant surprise for Japan’s suffering exporters, the disruption in Europe’s and Japan’s solid status as a safe havens for investment funds will likely continue to support the Yen as market participants shed risk from their portfolios in the near and medium term. European debt repayment concerns and fears of a contagion effect have put the global recovery on its heels and given risk bears something to talk about. Accordingly, it seems unlikely the USDJPY movement seen in the last couple of weeks signals a full reversal in sentiment. As the emphasis bounces back and forth between interest rate differentials and market participants’ treacherous love affair with risk, the logical result, as seen this past month, will be volatility.
Technical Analysis
With the levels of uncertainty currently being experienced in the market, the Yen’s status as a safe haven currency, and a lack of any meaningful market direction, near-term expectations call for volatility to persist as we move into the new fiscal year. Renewed interest in Yen-funded carry trades, as well as bouts of risk acceptance, will come up against Euro-centric risk aversion, pressuring the Yen in whichever way the sentiment du jour favours. Versus the USD, we should see the JPY bounce around in a wide range, contained to the topside by 93.20, which has thwarted the Yen’s attempts to slip beyond it several times in the past. To the bottom side, 88.50 will be the first major support containing the pair, with a break below 86.41 (a low from November 2009) needed before another round of Yen appreciation could be said to have been established. The reality is, however, that any serious movement towards the 88.50 barrier will most likely result in a BoJ intervention in the markets – both literally and verbally, as has happened in the past.
Against the crosses, the Yen will continue to trade as a proxy for risk. The clearest example of this is the EURJPY. Since January, the pair has tumbled from 133.50 to 121.00 in early March. While the pair has stabilized and retraced slightly to 124.00 on the back of the fiscal year-end volatility, the move is unlikely to represent a change in overall sentiment. As the economics and politics of the European situation play out, downside risks will continue to weigh on the pair. Conversely, the general market perception, and broad performance of the Australian dollar, has been positive, and the AUDJPY has rallied from 77.00 at the beginning of February to 84.00 as March draws to a close. The key driver here is expectations regarding Australian interest rates. Given the hawkish stance of the RBA, the current pause in fiscal tightening is seen as temporary, and as market participants position themselves for more rate hikes, the pair is likely to continue to move up.
It is a rocky road ahead for Japan, as its domestic economy seems paralyzed by deflation and unable to pull itself together on its own. Various foreign issues are pulling the Yen in all directions, thus impairing the critical export sector. A great distance in terms of recovery still needs to be covered on the global economic stage before the Yen can begin to return to pre-risk-aversion levels. Persisting uncertainty regarding the global economic recovery will continue to support the Yen against major trade currencies like the USD and EUR, and at the same time hamper the Japanese recovery.
Source: Custom House, A Western Union Company
Custom House has based the opinions expressed herein on information generally available to the public. Custom House makes no warranty concerning the accuracy of this information and specifically disclaims any liability for trading decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon
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