Japanese Yen to Rise as Risky Assets Extend Losses

The Japanese Yen may continue to outperform in the week ahead as risky assets reverse lower, boosting demand for the safety-linked currency. Indeed, last week saw the Japanese unit add over 1.4% against the US Dollar, topping the gains scored by the other majors.

[B]Japanese Yen to Rise as Risky Assets Extend Losses[/B]

[B]Fundamental Outlook for Japanese Yen: [/B][B]Bullish[/B]

The Japanese Yen may continue to outperform in the week ahead as risky assets reverse lower, boosting demand for the safety-linked currency. Indeed, last week saw the Japanese unit add over 1.4% against the US Dollar, topping the gains scored by the other majors. Short-term studies reveal that a trade-weighted average of the Yen’s value against a basket of top currencies is now -87.3% inversely correlated with the MSCI World Stock Index. For its part, the MSCI metric looks to be carving out a double top at resistance marked by the November 2008 swing high having reversed lower to break out of a rising channel that has guided prices higher since March. This suggests that continued weakness in risk appetite awaits ahead, giving impetus for Yen bulls to retain momentum.

Turning to the economic calendar, the April’s Tertiary Index is expected add 2.3% having dropped -4.0% in the previous month. Although an improvement in percentage terms, such a result would still put merchant sentiment at the lowest level in 5 years and firmly within the downward trajectory that has held since the index topped out in August 2007. The Trade Balance surplus is expected to grow to 215.4 billion yen in May from 67.7 billion in April. This would imply that Japan’s external position deteriorated about 37% from a year prior, a relative improvement from -91.8% in average annualized losses recorded over the past three months. That said, the trade surplus has trended lower since September 2007 and is likely to continue to do so. Global demand is expected to remain lackluster, with The International Monetary Fund forecasting that world trade volumes will contract by a whopping -11% this year and recover just 0.6% in 2010, spelling continued trouble for exporters. Indeed, a survey of economists conducted by Bloomberg suggests that the share of overseas sales in Japan’s overall Gross Domestic Product will to the lowest level in 7 years in 2009. Rounding out the week, the Consumer Price Index is set to drop -1.1% in the year to May, the largest decline since April 2002 and just a hair off the record low at -1.6%. Deflation looks set become entrenched once more in the world’s second-largest economy, keeping a lid on a meaningful rebound in economic activity as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment. – IS