After July NFPs Miss, Japanese Yen Set to Extend Gains if BoJ Holds
Fundamental Forecast for Japanese Yen: Neutral
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Beware Siren Call of Tempting EUR/USD and Yen Crosses Reversal
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Japanese Yen Extends Gains as Japan’s ‘Third Arrow’ Becomes Clearer
The Japanese Yen finished in the middle of the pack last week, but dropped by less than one percent against the top performers as a late-Friday surged helped boost the Yen crosses. TheUSDJPY closed the week higher at ¥98.94, up by +0.74%, after a run at triple digits was thwarted by a weak July US labor market report. With it looking less likely that the Federal Reserve will begin to taper QE3 at its September meeting, the Yen’s fundamental footing next to the US Dollar has improved relatively speaking.
Certainly, if the Fed is less likely to taper QE3 within the next two months, then bond markets across the globe will need to readjust if only slightly: sovereign bond yields shot up in the wake of the Fed’s June policy meeting. But new speculation about the Fed doesn’t stand to just benefit the Japanese Yen; higher yielding currencies that have weakened dramatically in recent weeks could gain too as the promise of more stimulus lingers.
In light of the extreme influence Fed policy has tended to have on the Yen crosses, we suggest that the overall picture for the Yen is “neutral” for the week ahead rather than bullish, as investor positioning remains quite extreme in some cases that could see reversals develop, particularly among the commodity currency bloc.
The Yen, however, does have the potential to be a top performer now that the Fed has sown the seeds for softer US yields. The Bank of Japan policy meeting on Thursday, the first since the Japanese diet elections two weeks ago, is possibly the most important event on the DailyFX Economic Calendar for the coming week.
The Japanese elections were expected to clarify the path towards more stimulus for Prime Minister Shinzo Abe and BoJ Governor Haruhiko Kuroda. Instead, with no supermajority, neither the fiscal nor the monetary authorities have spoken with the conviction of those that felt like whatever policies they wanted to push through, they could with ease. While I originally (and wrongly) suspected that the Yen would weaken after the elections, it has not for two key reasons, one of which will be highly debated this week at the BoJ’s policy meeting.
On the fiscal side, recent chatter has been that the government will no longer pursue its long-discussed sales tax hike. So far, this has been a bullish catalyst for the Yen, and should it become set in stone, it could even more so. If there is no sales tax hike, consumers have more disposable income than they would have had otherwise. Accordingly, in line with recent trends, they would consume more. Therefore, prices would be supported by bolstered aggregate demand, keeping inflation pointed higher. Thus, growth is stronger, inflation is higher, and the BoJ wouldn’t have to act further to weaken the Yen.