After weeks of range-trading, USD/JPY finally broke lower as risk aversion made a comeback. Indeed, US stock markets like the DJIA – which holds a correlation with the Japanese yen crosses – took a heavy hit on Thursday morning as Goldman Sachs downgraded Citigroup and General Motors shares, and also downgraded the entire US brokerage sector from “attractive” to “neutral.” This only served to exacerbate the market’s bearish sentiment on the financial sector and has stirred fears that the worst for the credit markets has yet to come. Risk aversion remained the primary driver of the markets on Friday as well, leading the USD/JPY to plummet and weighing the DJIA down for a test of 11,300 and down 20 percent from October’s record high.
As usual, Japanese economic data had very little impact on the low-yielding yen, as the currency gained despite disappointing household spending and small business confidence readings. Furthermore, the Business Sentiment Index (BSI) for large industries slumped to -15.2 from -7.2, which was the worst reading since the government started keeping records in 2004. Clearly, a slowing global economy is taking a toll on export-dependent Japan, particularly producers. Unfortunately, consumers are highly unlikely to pick up the slack, as tepid wage growth and rocketing food and energy prices squeeze disposable income, and thus, leaves little for discretionary spending. As a result, prospects for Japanese GDP remain weak.
Looking ahead to this week, Japanese data is anticipated to reiterate this sentiment as the Bank of Japan’s Tankan survey will likely fall in line with the government’s BSI report. However, the Tankan release is considered to be a bit more influential as it will give a glimpse as to what the central bank’s view is on the economy. While the Bank of Japan is not likely to consider cutting rates anytime soon given strong consumer price pressures, the data could still weigh on the Japanese yen. Nevertheless, with risk aversion likely to remain the predominant theme in the markets even in the week ahead, the odds are a bit more in favor of Japanese yen strength (USD/JPY weakness).
From : DailyFX