Japanese Yen Gains Likely To Be Short-Lived On Fading Fed QE Bets

By Ilya Spivak, Currency Strategist

Fundamental Forecastfor the Japanese Yen: Bearish

The Japanese Yen outperformed last week, rising against all of its major counterparts. Interestingly, the advance came even as the Bank of Japan expanded policy easing efforts. While cumulative monetary expansion amounted to just ¥5 trillion – a figure at the low end of market expectations – there seems to be more to the Yen’s move higher than just disappointment with the BOJ’s reserved posture. Indeed, a trade-weighted index tracking the Japanese currency’s value against an average of its leading counterparts shows a strong inverse correlation with the 10-year US Treasury bond yield, hinting a an important part of its advance owed to renewed hopes for another round of QE from the Federal Reserve following last week’s FOMC policy announcement.

The markets seized on comments from FedChairman Ben Bernanke saying policymakers were “prepared to do more” to help theeconomy if growth faltered, singling out additi onal quantitative easing (QE) as still “on the table”. Traders opted to take the statement in isolation, reading it as project ing a relative increase in the likelihood ofanother balance sheet expansion . This weighed on US yields, pushing the Yenhigher as investors responded by increasing the weight of the USDollar as funding currency in carry portfolios to the benefit ofYen, the other common low-yielder of choice for beta-seekingplays. This kneejerk reaction doesn’t seem tohave staying power however as markets invariably digest the remainder of Bernanke’scommentary.

Keeping QE3 “on the table” makessense. After all, it would be unreasonable to expect the Fed to do nothing ifgrowth were to falter anew. Meanwhile, Bernanke made it clear thatadditional asset purchases were not favored, saying it would be“very reckless” to allow higher inflation for the sakeof reducing unemployment. The central bank chief also added thatthe pledge to keep rates low through late 2014 was contingent oneconomic data and subject to revision if conditions were to warrantit (which presumably means rates can rise faster than the Fedcurrently expects). Coupled with upgraded growth, employment andinflation forecasts, this hardly seems to foreshadow additionalstimulus in the pipeline, at least for now .

The week ahead offers a wealth of top-shelf USeconomic data including the ISM Manufacturing gauge and theall-important Nonfarm Payrolls print. Expectations are subduedacross the board, leaving the door open for an upside surprise toforce the markets into reflection mode. Indeed, as we argued last week , the recently lackluster performance from USeconomic data relative to consensus forecasts likely reflected acatch-up upgrade in economists’ view on the pace of recoveryrather than a meaningful slowdown in performance. The pendulum isbound to swing in the other direction following recentdisappointments, laying the foundation for a run of outperformancein US economic news-flow that tames QE3 hopes and allows yields torecover and countering Yen strength. – IS
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/jpy/2012/04/28/Japanese_Yen_Gains_Likely_to_be_Short-Lived_on_Fading_Fed_QE_Bets.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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