Japanese Q1 GDP May Fall Record 16.1% - Yen Response to Serve as Risk Trend Barometer

The Japanese yen has been trading according to risk trends lately, but tonight’s release of Japanese GDP has the potential to shake that dynamic up.

On January 20, the CBOE’s VIX volatility index reached its 2009 peak of 57.36 (the 2008 record was much higher at 89.53), and since then, its slow and steady decline has signaled that risk appetite has improved, which explains why the Japanese yen has also gradually pulled back. Japanese fundamentals have remained pretty bleak this entire time, and are expected to get even worse. That said, since we haven’t seen Japanese economic news have a clear impact on Japanese yen price action, tonight’s release of GDP and the yen’s reaction may serve as a good gauge of how strong of a hold risk trends have on the market. Indeed, a response in the direction of the news (JPY decline with disappointing data) would suggest that fundamentals are becoming increasingly important, while a response to investor sentiment (JPY appreciation amidst deleveraging on disappointing data) would suggest that the link between FX carry trades and equities remains strong.

[B]CBOE VIX Index (Daily Chart)[/B]

[I]Source: Bloomberg[/I]

Looking to the data on hand, at 19:50 ET tonight, Japan’s Cabinet Office will release preliminary growth readings, and after three consecutive quarters of contraction, the outlook doesn’t look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has slowly climbed to a nearly five-year high, and perhaps even worse, cash earnings growth contracted by 3.7 percent in March from a year earlier, the sharpest drop since 2002. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 46.5 percent in March from a year ago, according to figures published by the Ministry of Finance.

As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 4.3 percent in Q1, with the annualized rate forecasted to plummet by a record 16.1 percent. There is a huge range of individual expectations included in that consensus outlook, with the high guess sitting at +2.0 percent and the low guess at -19.8 percent, but all told, the majority of the forecasts are below -13 percent.

Turning our attention to the JPY crosss, AUD/JPY remains containing to a rising channel formation while EUR/JPY has spent the past two months narrowing toward the apex of a large wedge formation. This tells us that AUD/JPY is still in an uptrend and that EUR/JPY could essentially break higher or lower at any point. Major pieces of event risk such as pivotal GDP reports tends to serve as sparks for large technical moves, so JPY traders should keep a close eye not only on the actual figures, but how the JPY crosses respond as well.

[I]Source: FXtrek Intellichart

Source: FXtrek Intellichart[/I]