This column was originally published on RealMoney on Feb. 9 at 12 p.m. EST. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here.

Over the last couple of weeks I have consistently argued (in

columns and the

Columnist Conversation) that the European finance ministers were setting up the market for disappointment if the G7 statement does not single out Japan or express concern over the weakness of the yen. I had thought such disappointment would hit the yen hard. However, the price action now has me suspecting that the market has sold yen on speculation about disappointment and is vulnerable to a buy on the fact.

Although this may strike some as counterintuitive, there's a market logic to the argument. Of course, with the Japanese markets on holiday Monday, there might be an initial spike down in the yen in early, thin trading. This might be better seen as an opportunity to book profits than the start of a new leg down for the yen.

A few considerations also warn of the risk of near-term yen gains. First, Japanese institutional investors frequently sell foreign assets ahead of their fiscal year-end, March 31. Weekly data from the Ministry of Finance indicate that Japanese investors already have begun selling foreign assets. Meanwhile, the same MOF series indicates that foreign investors have stepped up their purchase of Japanese stocks and bonds.

Second, next week (Feb. 14), Japan reports its fourth-quarter GDP. Recall that third-quarter GDP was disappointing, dragged down by the weakest consumption figures since the retail sales tax was hiked in the late 1990s.

Japan is likely to report a strong rise in fourth-quarter GDP of around 1%, compared with a 0.2% increase in the third quarter. At an annualized pace, this is around 4%, which would mean that Japan was the best G7 performer in the fourth quarter.

Consumption is also likely to have rebounded smartly. At the same time, deflationary pressures in Japan probably eased. The deflator is expected to be -0.5% after a 0.7% decline in the third quarter.

Such a strong report may renew speculation that the Bank of Japan may indeed raise interest rates at its Feb. 20 meeting. Many analysts, myself included, have been surprised by the length of time between hikes, and some have given up on a rate hike in the current fiscal year. Those members of the BOJ board who voted in January in favor of a hike still sound hawkish, while some from the majority seem to be in no hurry to switch sides, and the market appears to remain closely divided.

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Third, market positioning among the speculative community appears to remain deeply short the yen. Earlier it appeared to me that the jawboning of European finance ministers would have produced a stronger bout of position squaring, but the market appears to be positioned for disappointment from the G7.

And with the event out of the way, shorts may reconsider their aggression. Indeed, given the deflation of market expectations, it wouldn't be difficult to envision a statement from the G7 that essentially reiterates its old saw about how currencies have a role to play in reducing global imbalances. That's G7-speak for "the dollar should fall and Asian currencies should rise."

I also had expected that if the G7 were to disappoint, the Swiss franc would suffer in sympathy with the yen. However, the Swiss franc has been sold off hard. Here, too, the price action warns that the market may have sold the rumor and may be poised to buy the fact. Over the last couple of weeks, Swiss National Bank officials have sounded particularly hawkish and more concerned about the weakness of the Swiss franc than appeared to be the case a few months ago.

That said, the soft January Swiss consumer price index (-0.7% month over month and +0.1% year over year) may have given some participants second thoughts about a March rate hike from the SNB. It is true that Switzerland's inflation is below Japan's, but Swiss National Bank officials seem more adamant about normalizing.

The Swiss economy has generally outperformed the Japanese economy. The Swiss current account surplus stands at almost 14% of GDP; compare that to with Japan's, which is near 3.5%.

On a knee-jerk spike in Asia early on Sunday, Johnny-come-lately types might initially sell the yen. This could lift the dollar toward JPY122.00 and the euro toward its recent high near JPY158.60, but I suspect the greater risk lies in the other direction. If this analysis is right, the yen can initially recover toward the upper end of its recent range. This would put the dollar nearer JPY120 and the euro near JPY155.30.

A similar scenario for the Swiss franc would warn of knee-jerk risk lower, with the euro extending recent gains toward CHF1.6300 and the dollar to around CHF1.2550. I suspect the bigger risk on a "sell the rumor, buy the fact" scenario would be for the dollar to retest the CHF1.2375 area and the euro to return to CHF1.6150.

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback;

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