The economic calendar is noticeably bare next week, with Thursday’s second-quarter Capital Spending release the only significant item on the docket. Expectations call for business investment to increase 0.2% having fallen -4.9% in the first three months of the year. On balance, Japanese Yen price action will likely continue to overlook the fundamentals of the domestic economy to be dominated by carry trade sentiment.
Fundamental Outlook for Japanese Yen: Bearish - Japanese headline inflation prints at 11-year high, BOJ still unlikely to act on interest rates - Industrial Production rebounds sharply on Chinese export demand, but is it sustainable? The economic calendar is noticeably bare next week, with Thursday’s second-quarter Capital Spending release the only significant item on the docket. Expectations call for business investment to increase 0.2% having fallen -4.9% in the first three months of the year. The improvement makes sense: traders have seen the most recent Merchandise Trade Balance and Industrial Production figures beat expectations as exports surged 8.1%. The uptick owed to buoyant demand from Asian emerging markets, most notably China. Indeed, outbound shipments to China grew 16.8% in July whereas exports to the EU rose just 4.1% and those to the US fell -11.5%. It is reasonable to suppose that Japanese firms pumped up capital expenditure to meet such strong demand. The top question going forward will be whether Japan can sustain such favorable trade results as the world economy decelerates. Slowing global demand will not leave China unscathed, and it remains to be seen if their hunger for Japanese goods will remain as robust now that the Olympic Games are over. Investors weighed in on the matter last week: the Hang Seng, Hong Kong’s benchmark equity index that lists a good portion of major Chinese companies, slumped sharply as the Olympics ended on uncertainty about the Asian giant’s continued ability to drive regional economic growth. The index rebounded sharply higher towards the end of the week following a surprisingly strong US Gross Domestic Product figure in the second quarter as the market entertained hopes that strong demand from the world’s largest economy would return. On balance, this suggests that barring a forceful recovery in US demand, Japanese economic prospects could substantially deteriorate into the second half of the year. All told, Japanese Yen price action will likely continue to overlook the fundamentals of the domestic economy. Bond yields and index swaps reveal the market is firmly convinced that Japanese interest rates are not going anywhere until at least the end of next year. What’s more, that rate change is expected to be an increase, whereas most other key central banks are on a path to cutting borrowing costs. Expectations of contracting yields have weighed heavily on the carry trade and are likely to see the Yen gain ground as deteriorating data in Europe, Australia, and New Zealand puts rate cuts within arm’s reach.