Yen Could See Major Boost if Jackson Hole Reveals Fed’s Hand
Fundamental Forecast for Japanese Yen: Neutral
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The Japanese Yen had a strong week, finishing the third best among the majors covered by DailyFX Research. The world’s second most prominent reserve currency didn’t finish that far from the top performers, the Euro and the Swiss Franc, shedding only -0.31% and -0.34%, respectively. The commodity currencies, led by the Australian Dollar, and the US Dollar paced the losers against the Japanese Yen: the AUDJPY depreciated by -1.28% and the USDJPY fell -1.12%. Despite this strong rebound for the Yen, which had been slipping against the other majors for a few weeks on sum, we don’t believe an outright bullish recommendation is warranted for the coming five-days.
In part, the economic docket isn’t positioned to help the Japanese Yen from a fundamental perspective. Data over the course of the week, culminating in inflation data, all points to one end: more easing from the Bank of Japan at some point over the coming months, be it a balance sheet expansion or a move to weaken the Yen.
While there’s a reading of Small Business Confidence in August expected on Tuesday, the data flow doesn’t truly begin on Wednesday when trade data is due. The July Retail Trade report is expected to show that conditions slowed by -0.5% on a monthly-basis, after contracting by -1.2% m/m in June. On a yearly-basis, the picture is slightly rosier, with only a -0.1% contraction is expected, after modest growth of +0.2% y/y in June. This data is discouraging, and any further slowing of trade would likely prompt further calls from policymakers that the ‘strong Yen is hurting export growth.’ The silver lining for this print is that the Yen had weakened significantly in July, so a boost could be had there for the trade data. If not, then calls for a weaker Yen could be bolstered.
On Thursday (Friday in Japan), there are a number of key releases. Early in the Asian session, the National Consumer Price Index for July is due, and it should show weaker inflationary pressures adding another data print suggesting a weaker Yen could be necessary. The headline year-over-year print is forecasted to read -0.3%, after a -0.2% deflation in June. The National CPI ex Fresh Food y/y will flash the same signs, while the National CPI ex Fresh Food & Energy y/y print is forecasted to show deflation of -0.6% in July, the same rate as the month prior. These too will fuel the call for more monetary easing.
Also due out on Thursday are housing data: Annualized Housing Starts are expected to have ticked up to 0.857M in July from 0.837M in June. Housing Starts, accordingly, are forecasted to have contracted by -10.3% on a yearly-basis in July. Overall, the fundamental picture, at least on the data front, is not sanguine for the Yen. Were the data the only influencer this week, we could suggest a weaker Yen for the coming days.
But also this week is the Jackson Hole Economic Policy Symposium, the meeting at which central bankers gather from around the globe to meet in Jackson Hole, Wyoming, to discuss global financial conditions and policies. Federal Reserve Chairman Ben Bernanke is expected to speak on Friday, at which he could tip the Fed’s hand towards easing. In the Federal Open Market Committee Minutes from the July 31 to August 1 meeting, it became clear that the Federal Reserve was leaning towards more easing, if warranted by economic conditions. With St. Louis Federal Reserve President James Bullard suggesting that the Minutes were “stale,” Chairman Bernanke’s speech is projected to hint at the Federal Reserve’s more recent assessment of the economy (and thus if it will need more easing). This threat alone – a confirmation of what was said in the Minutes – keeps the Japanese Yen’s forecast from being bearish and pulling it up to neutral: if the Federal Reserve is indeed inching closer to easing – that recent data hasn’t been strong enough to deter a move in September – the Japanese Yen is likely to rally immensely, especially against the US Dollar. –CV
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