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Japanese Yen to Ignore Domestic Data, Focus on Fed Policy Speculation

Japanese Yen to Ignore Domestic Data, Focus on Fed Policy Speculation

Ilya Spivak, Head Strategist, APAC
Japanese Yen to Ignore Domestic Data, Focus on Fed Policy Speculation

Fundamental Forecast for Japanese Yen: Neutral

  • Yen to Overlook Japanese News-Flow on Limited BOJ Policy Impact
  • Upbeat US Economic Data May Fuel Risk Aversion, Send Yen Higher
  • Help Identify Critical Turning Points for USD/JPY with DailyFX SSI

The Japanese Yen is unlikely to pay much attention to a busy calendar of domestic data releases on tap in the week ahead. Traders care about economic news-flow in as much as it is able to influence monetary policy. This is not so in Japan, with the BOJ seemingly on auto-pilot. Indeed, central bank Governor Haruhiko Kuroda toed a familiar line in the press conference following last week’s policy announcement, saying the economy continues to exceed expectations and arguing that CPI will reach the target 2 percent within the projected period.

Such rhetoric sounds somewhat dubious considering data outcomes have increasingly underperformed relative to consensus forecasts and priced-in inflation expectations have declined since the beginning of the third quarter. This doesn’t matter all that much from an actionable trading perspective however unless the BOJ is prepared to expand stimulus efforts. What we are hearing from Mr Kuroda and company suggests this is not the case, meaning that Japanese economic news-flow is essentially not a factor in setting the trajectory of the exchange rate (at least for now).

This puts external forces in the driver’s seat, with speculation about the time gap between the end of the Federal Reserve’s “QE3” effort in October the first subsequent interest rate hike still in focus. Last week’s US Employment report did not prove to be as pivotal as advertised. The narrative around the news-wires following the revelation of Augusts’ disappointing 142,000 payrolls increase – a reading far smaller than the 230,000 gain expected – seemed outright dismissive. A chorus of talking heads labeled the outcome a seasonal aberration, pointing to four consecutive years of August jobs data that came in low initially only to be revised meaningfully higher in subsequent releases. That leaves the markets searching for a big-splash catalyst, making for a data-sensitive environment going forward.

With that in mind, the week ahead offers a number of potential inflection points. The JOLTS labor market report – allegedly a favorite of Fed Chair Janet Yellen – as well as retail sales and consumer confidence figures headline the docket. The trend in US economic data in the weeks leading up to Augusts’ jobs report was decidedly rosy. If Augusts’ payrolls print is to be dismissed as a fluke rather than treated as a turning point, another round of upbeat results may fuel bets on a relatively sooner onset of policy tightening. That has the potential to touch off risk aversion considering the formative role of Fed stimulus in elevating sentiment in recent years. Such a turn of events is likely to bring with an unwinding of Yen-funded carry trades, sending the Japanese unit higher against the majors.

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