Talking Points:

Yen Outperformed on Safe-Haven Flows Amid Risk Aversion in Asian Trade
Quiet European, US Data Docket May Keep Seasonal Forces in the Spotlight
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The Japanese Yen outperformed in overnight trade, rising as much as 0.8 percent on average against its leading counterparts, as risk aversion swept Asian bourses and drove demand for the safety-linked currency. The MSCI Asia Pacific regional benchmark stock index fell 0.6 percent, sliding for a second consecutive day. We detailed in our weekly forecast that the Yen may be due for a significant recovery on the back of year-end liquidation of “risk-on” exposure.

Looking ahead, a lackluster economic calendar in US and European hours may keep seasonal forces at the forefront. Swelling risk appetite – embodied by a relentless push upward by the S&P 500 – and a firming US Dollar have been the defining market themes in 2014. Profit-taking on these trades ahead of the calendar turn to 2015 would imply a parallel downturn in the greenback and the benchmark stock index. Indeed, the two now have a positive correlation of 0.74 (on rolling 20-day studies).

A downward USDJPY reversal seems to best embody both sides of the corrective year-end thrust. On one hand, risk aversion points to the unwinding of frequently Yen-funded carry trades. On the other, a market-wide reversal of Fed-inspired US Dollar buying is likely to put potent downward pressure on USDJPY, where the influence of the US unit’s growing yield advantage has been particularly acute. For its part, technical positioning is warning an interim USDJPY top may be in place.

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