Japanese Yen at Risk of Deeper Losses on G7 Meeting Outcome

The Japanese Yen is at risk of deeper losses as G7 officials take an accommodative at a meeting this weekend, boosting broad-based risk appetite.

Talking Points

Japanese Yen Continues to Sink in Asia, Deeper Losses Seen Ahead
G7 Likely to Take Accommodative Tone on Fiscal, Monetary Policy

The Japanese Yen continued to sink in overnight trade, down as much as 0.6 percent on average against its top counterparts, as risk appetite firmed across most Asian stock exchanges and encouraged capital flows out of the go-to funding currency. The Nikkei led regional bourses higher, a move the newswires attributed back to the Yen to suggest a feedback loop whereby the currency’s weakness fed upon itself. The benchmark USDJPY exchange rate topped the psychologically significant 100.00 mark for the first time in four years earlier in the day after US Initial Jobless Claims unexpectedly fell to the lowest level in over 5 years. This rebooted expectations for a near-term tapering of Federal Reserve stimulus efforts, offering broad-based support to the US Dollar.

The economic calendar is quiet in European session hours and through the end of the trading week. This puts the spotlight on a meeting of G7 finance ministers and central bank governors set to begin today and carry into the weekend. Trades will look for commentary about the so-called “currency war” after central banks in New Zealand and Australia seemingly jumped into the fray this week. The debate between countries promoting fiscal austerity and those in favor of pro-growth policies as the way to correct global imbalances and spur recovery is likewise set to continue.

On balance, officials are unlikely to issue much besides vague admonishments against competitive devaluation given the increasingly widespread drive toward monetary stimulus across the globe. Meanwhile, policymakers’ taste for deficit reduction seems to be on the wane, pointing to the likelihood of a relatively accommodative tone to official rhetoric. Taken together, this seems supportive for risk appetite, which seems to open the door for continued Yen weakness as capital pours into carry trades financed in terms of the perennially low-yielding currency.

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