Japanese Yen Pulls Back Across the Majors as Volatility Cools

Japanese Yen Pulls Back Across the Majors as Volatility Cools, Industrial Production Expected to Fall by Record

he Japanese yen slipped lower against the US dollar and euro on Tuesday, but fell the most against the Canadian dollar and Swiss franc, which were actually some of the strongest currencies in the forex markets. Given the lower volumes associated with holiday trading, as well as a significant drop in financial market volatility as indicated by declines in the CBOE’s VIX volatility index over the past month or so, much of the fuel behind the Japanese yen’s past gains have been eliminated. This is surely comforting to the Bank of Japan, as the appreciation of the currency has been extremely detrimental for the Japanese economy. However, this does not mean that Japan will not attempt to intervene in the currency markets, as the yen remains historically high. Indeed, if there is a good time for the country to step in to physically drive the currency down, this may be it.

Looking ahead, the Japanese economy fell into recession during Q2 and Q3 of 2008, and upcoming data is likely to indicate that it extended into Q4 as well. Industrial production for the month of November is forecasted to fall by 6.8 percent, bringing the annual measure down to a record low of -15.0 percent. Manufacturers are feeling the impact of a slowing in domestic demand, as well as foreign demand, which has only been exacerbated by the rapid appreciation of the Japanese yen. Individual economic releases don’t tend to have a huge impact on the Japanese yen, but this is still an indicator that may be worth watching.

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