JPY Fundamental Analysis-6 July 2009

By: William Doody
The Japanese Yen is set to benefit from renewed fears about the pace of the global economic recovery. Increasing signs from the data released last week and from politicians’ comments in recent days all point to an anemic recovery at best, with little hope for a sharp rebound in the world’s major economies. Worse-than-expected unemployment and job loss data from the U.S. as well as more significant bank losses in the EU further undermined the already fragile state of investor confidence. Meanwhile, the impending meeting of the G-8 is already generating headlines. With politicians from China, India, and Russia all making critical comments against the Dollar (and in Russia’s case, against the Euro as well), the stage is set for volatile trading in the currency markets.

Although Japan’s domestic economy remains quite weak, the government’s long-standing zero interest rate policy has afforded the Yen a measure of stability and helped to establish it as a “safe-currency”, especially in comparison to regional commodity currencies such as the Australian Dollar or developing markets such as South Korea. For this reason, signs of weakness in the economic recovery will benefit the Yen, as investors will look to safe-haven currencies. Such weakness will most likely also drive down currency prices, which will further benefit the Yen through a drop in value for currencies such as the Australian Dollar. Even more volatility is sure to be added in later in the week as companies begin to report second quarter earnings, providing insight into the pace of recovery.

Meanwhile, the Yen may benefit from renewed speculation about the long-term future of the U.S. Dollar and the Euro in the face of public criticism by some politicians. While their status is secure for the short-term, there is no doubt that the leaders of developing economies hope to implement changes to the current currency regime moving forward.