Japanese Yen May Strengthen on Declining Global Outlook

12/29/2008 11:03 am EST

Focus: FOREX

The Japanese yen lost ground to the dollar for the first week in two months as Japanese fundamental data signaled that the economy is headed into a prolonged recession.

Chart

Indeed, industrial production declined 8.1%, which was the fastest pace in 55 years. Additionally, the record low PMI reading of 30.8 leaves little hope that activity in the world’s second largest economy will rebound in the near term as companies continue to pull back in the face of a recession. The release of the BoJ minutes revealed that the committee had discussed taking on credit risk a month before they started buying short-term debt following their announcement of a 0.2% rate cut. Policy makers stated that the increasing difficulty of Japanese companies to obtain credit due to “deteriorating markets” forced them to take further action. Yesterday, Bank of Japan policy board member Hidetoshi Kamezaki said officials may consider “extraordinary steps” to improve access to funding for companies.

The USD/JPY rose to as high as 91.30 last week, where it ran into resistance at the 20-day SMA. The failure to break above the short-term technical indicator may be a sign that investors are still reluctant to abandon their yen long positions. The deteriorating fundamentals globally have increased fears that the current global recession will continue to deepen, which remains a dampening factor on risk appetite. The lack of Japanese economic data on the docket and the new year will leave many traders on the sidelines, setting up for another week of low volume. However, we could see bargain hunting and year-end buying fuel a bout of risk appetite. A break above the 20-day SMA may lead to a change in bias and further yen losses.

By John Rivera, Currency Analyst, DailyFX.com

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