The optimistic scenario for the USDJPY that reigned in the second half of 2014 was that, if the robustness of US growth succeeds in powering a global recovery, the markets could take on a risk-on bias, and the USD/JPY could trend even higher. The USDJPY did see a major upward move in the second half of 2014.
However, the solitary outperformance by the US economy also has a darker possibility, as it could destabilize the global outlook. In first half of 2015, the USDJPY will falter between these two scenarios, see figure 1.
Risk appetite pivot point
The general slowdown in demand has harmed resource prices. This overlapped with a rising dollar on the strength of the recovering US economy, which in turn pushes dollar-denominated resource prices down. This has weakened the currencies and assets of resource-exporting nations with current account deficits. Russia's struggles have put pressure on Germany and other European economies, reigniting fears of deflation risk and debt problems within the region.
While the falloff in oil prices is positive for oil importers like the advanced economies, it has heightened the risk-off (decreasing risk appetite) stance in the markets. This is in contrast to risk-on (increasing risk appetite) expectations for 2015 that dominated a few months ago.
Basic prediction of a US economic recovery remains firm. Prospects for the Eurozone economy, though revised downward, also remain positive. Chinese growth looks to slow down, but the government is attempting to engineer a soft landing.
The solid US economy probably will cause the USD/JPY trend to be upward. However, the market environment will not be risk-on this year. The USD/JPY will thus probably try new highs this year, but the risk-off environment will cause more volatility on both the upside and downside of the spectrum.
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Gelein has been interested in the financial world and global economics since high school. For over 3 years he has been a member of a university investment team, of which one year he was the treasurer.