Japanese Yen Fundamental Forecast, Bank of Japan, Shinzo Abe, US-China – Talking Points:
- Seasonal volatility suggests that the Japanese Yen[1] may outperform its major counterparts in the coming weeks
- US-China tensions threaten to sour sentiment and could buoy haven-associated assets
- Record government debt issuance could force the Bank of Japan’s hand and limit JPY’s potential upside.
JPY Fundamental Forecast: Mixed
The haven-associated Japanese Yen’s sensitivity to volatility may buoy the under-fire currency in the coming weeks, if escalating geopolitical tensions and a stuttering global economic recovery notably sour market sentiment.
The market’s fear-gauge – the Volatility Index or VIX – has steadily drifted lower since peaking on March 18, as central bank’s around the world injected an unprecedented amount of liquidity into the financial system in response to the novel coronavirus pandemic.
This substantial increase in liquidity appears to have suppressed volatility for the time being, directing the VIX lower and in turn dragging the ‘safe haven’ Japanese Yen along for the ride.
However, the seasonal nature of the VIX suggests a resurgence of volatility could be in the offing. The volatility index has climbed 33.76% on average over the last five years in August and is currently down 5.1% heading into the tail-end of the month.
Moreover, a multitude of fundamental headwinds could potentially trigger a flight to safety as the summer lull draws to an end, with an expected increase in volume at the beginning of September potentially exacerbating market volatility and possibly fueling the Japanese Yen.
JPY Index** vs Volatility Index (VIX)
JPY Index daily chart created using TradingView
**JPY Index averages CAD/JPY[2], AUD/JPY[3], EUR/JPY[4], GBP/JPY[5]
US-China Tensions Likely to Escalate Ahead of Elections
The
