Dependent On Equities of Yen
The Japanese Yen traded choppily across the majors last week as the markets were thrown into turmoil amidst major volatility in equities. Indeed, Asian stock markets plunged early in the week, and with Wall Street closed on Monday, there were well-warranted fears that indexes like the Dow and S&P 500 would plummet upon Tuesday’s open. Fear continued to climb as futures for those indexes were down more than 5 percent during the Tokyo and London trading sessions, but the markets breathed a sigh of relief when the Federal Reserve came to the rescue with an emergency 75bp rate cut.
However, it was revealed later in the week that Bernanke & Co. were not aware that on Monday, Société Générale unwound the positions of rogue trader Jérôme Kerviel, which is likely to have contributed to the sharp drops in European shares that added to the broad bearish market sentiment. So the question is: did the Federal Reserve flinch in the face of a stock-market sell-off and use monetary policy to quiet the cries of Wall Street? This is what markets should be wondering as they try to speculate what the Federal Reserve will do this Tuesday.
That said, with risk aversion trends and the status of the US Dollar remaining the primary driver of USD/JPY – rather than Japanese fundamentals – the Federal Reserve’s rate decision on Tuesday and the reaction of global stock markets remain the key event risk for the pair. If the Fed’s rate cut last week was indeed a panic response and an ill-advised decision, the central bank may not see the need to reduce rates again, even though fed fund futures are pricing in at least a cut to 3.25 percent, and 70 percent chance of a decrease to 3.00 percent. In this case, risk aversion and flight-to-safety may emerge again, sending global equities and the Japanese Yen pairs spiraling lower.
On the other hand, as Technical Strategist Jamie Saettele pointed out in Friday's Daily Technical Report, USD/JPY may “exceed 107.92 and test resistance in the mid 108’s” in the near term before moving on to another bearish leg. Nevertheless, it will be important to look at Japanese economic data as well, as the figures may guide future monetary policy decisions by the Bank of Japan. Retail sales and labor market conditions are anticipated to deteriorate, as tepid wage growth and falling disposable income (as a result of energy and food price gains) do little to boost already-weak consumption in the country.
Meanwhile, industrial production is forecasted to rebound in December on the back of Asian demand for Japanese goods, but with global growth expected to slow in 2008, exporters are likely to reduce output in coming months.
However, it was revealed later in the week that Bernanke & Co. were not aware that on Monday, Société Générale unwound the positions of rogue trader Jérôme Kerviel, which is likely to have contributed to the sharp drops in European shares that added to the broad bearish market sentiment. So the question is: did the Federal Reserve flinch in the face of a stock-market sell-off and use monetary policy to quiet the cries of Wall Street? This is what markets should be wondering as they try to speculate what the Federal Reserve will do this Tuesday.
That said, with risk aversion trends and the status of the US Dollar remaining the primary driver of USD/JPY – rather than Japanese fundamentals – the Federal Reserve’s rate decision on Tuesday and the reaction of global stock markets remain the key event risk for the pair. If the Fed’s rate cut last week was indeed a panic response and an ill-advised decision, the central bank may not see the need to reduce rates again, even though fed fund futures are pricing in at least a cut to 3.25 percent, and 70 percent chance of a decrease to 3.00 percent. In this case, risk aversion and flight-to-safety may emerge again, sending global equities and the Japanese Yen pairs spiraling lower.
On the other hand, as Technical Strategist Jamie Saettele pointed out in Friday's Daily Technical Report, USD/JPY may “exceed 107.92 and test resistance in the mid 108’s” in the near term before moving on to another bearish leg. Nevertheless, it will be important to look at Japanese economic data as well, as the figures may guide future monetary policy decisions by the Bank of Japan. Retail sales and labor market conditions are anticipated to deteriorate, as tepid wage growth and falling disposable income (as a result of energy and food price gains) do little to boost already-weak consumption in the country.
Meanwhile, industrial production is forecasted to rebound in December on the back of Asian demand for Japanese goods, but with global growth expected to slow in 2008, exporters are likely to reduce output in coming months.
AUDNZD Technical Fundamental
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