Japanese Yen Volatility Ahead as Carry Trades Track Stock Performance

Japanese Yen Volatility Ahead as Carry Trades Track Stock Performance 

 

Fundamental Forecast for Japanese Yen: Bullish

 

 Speculative Sentiment Hints Japanese Yen Rally to Continue

 Japanese Corporate Prices Underperform, Reinforce Deflation

 

The Japanese Yen is likely to continue looking to stock markets as the dominant driver of price action amid another busy week of first-quarter earnings reports and the apparent return of acute uncertainty over the sovereign debt crisis inside the European Union.

Currency markets – and carry trades in particular – are likely to remain highly sensitive to risk sentiment. Indeed, a Deutsche Bank index tracking G10 FX Carry Trade performance now shows a hefty correlation reading of 0.88 with the MSCI World Stock Index. A good deal of carry trades are financed cheaply in Yen, tying the Japanese unit to the ups and downs on Wall Street ahead of another week of first-quarter earnings reports, this time from such heavy-weights as American Express, Johnson & Johnson, Coca Cola, and Boeing.

 

The Greek debt crisis and the following bailout fiasco further complicate the risky asset landscape. Indeed, investors have turned restless once again after the dust settled around the latest European Union rescue plan, with the yield spread between Greek 10-year bonds and those of Germany (the region’s benchmark) widening to more than 400bps for the first time in a week. Indeed, Greek Prime Minister George Papandreou is scheduled to begin a series of talks with EU and IMF officials – the principals behind any bailout effort – beginning on April 19. Athens has insisted that it still means to finance its budget shortfall in the markets, but traders will be acutely tuned in to the summit’s proceedings for signs that the southern European country will in fact pull the trigger on activating outside aid. - IS