"Abenomics" Comes up a Little Short
Weaker-than-expected Japanese GDP data indicated that the country’s massive stimulus program hasn’t fully kicked in, but on the other hand, the miss may now help fend off the planned sales tax increase.
The US dollar (USD) was slightly bid at the start of the week's trade as currency markets shrugged off weak GDP numbers from Japan and the euro (EUR) came under pressure on news that Greece will need additional bailout funds after the German election in September.
In Japan, the GDP report missed its mark by a wide margin, printing at only 0.6% versus 0.9% expected as the stimulus from Prime Minister Shinzo Abe's reform program failed to produce the full intended effect. Nevertheless, the headline number may have been worse than the reality, as much of the miss was due to the drawdown of inventories, which contributed -1.1% to the overall number.
On the other hand, consumption, which constitutes more that 60% of the Japanese economy, rose at a 1.9% rate, indicating that spending is slowly starting to pick up as Abe tries to infuse the economy with more confidence.
The USDJPY initially plunged to a low of 95.91, but recovered all of its losses and was up as the Asian session wore on. One of the unintended positive consequences of the weak GDP data is the fact that it may now delay the controversial planned increase in the sales tax as Japanese officials fear the economy may not be strong enough to absorb the shock to consumption.
For now, USDJPY appears to be stabilizing near the 96.00 level and as traders await fresh data from both the US and Japan. With many traders on both sides of the Pacific out on holiday, the pair could remain range-bound in the near term until markets get better clarity starting in September.
Another Wave of Greek Stimulus Upcoming
Meanwhile, in Europe, the EURUSD drifted lower, breaking below the 1.3300 barrier following a weekend report that Bundesbank expects further aid packages to Greece after the German election in September. Today, Greek GDP printed better than expected and was revised to -4.6%, which is the lowest rate of decline since 2011, but is still markedly contractionary.
Dollar Searching for Rally Fuel
In today's North American session, the docket contains only the monthly US budget statement, and slow trading conditions could prevail until tomorrow's US retail sales report, which will offer traders a better look at consumer spending at the start of Q3.
If the retail sales data shows further weakening, the greenback could quickly give up today's gains as markets begin to doubt the likelihood of a September taper by the Federal Reserve.
See related: US Data the Dollar Is Counting on
By Boris Schlossberg of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.