Hitting four-year highs late last week, the USD is experiencing a steady decline against the JPY. The trend started Monday with nearly a 200 pip loss so far. The pair is currently trading around 122.30 after peaking at 124.13. With multiple indicators from both countries being released this week, you can expect much more volatility and an unwinding of the carry trade.
As with almost everything else, the sub-prime mortgage issue has been responsible. Investors fearing the problem could spill over into the broader economy are second guessing their investments. Becoming more risk averse, they have reduced on the carry trade.
Every day brings with it the latest breaking news on sub-prime mortgages. Financial pieces mention it frequently. As long as this trend continues or new information emerges, you can expect investor confidence to wane. With that, the carry trade will only continue to look less attractive resulting in a weakening of the USD/JPY. But Japan’s economic outlook also needs to be factored in.
Yesterday’s retail sales showed surprising strength by the Japanese consumer. Posted at 0.1% for May, the data reversed a negative trend occurring for the past 8 months. Few economists expected it with a majority predicting a ninth consecutive loss. This figure is understated with Internet purchases and services spending not being factored in. Last month’s retail sales came out at -1.8%.
Japanese industrial production will be released today at 7:50 PM ET. With 3 consecutive monthly losses, it will be closely monitored as economists predict a 0.9% gain. This gain would signal a reversal in the worst manufacturing slump in over a year.
Higher demand in the economy could support the Bank of Japan’s position for lifting interest rates. Central bankers have wanted higher rates for some time. They blame their currency’s weakness on the relatively low interest rate of 0.5%. With 3 months of price declines, these reversals in demand could spark inflation to give them what they’ve wanted.
Japanese Finance Minister Koji Omi intervened yesterday with a speech on the undervalued yen. He stressed the risk of one-way foreign-exchange bets claiming that the government is watching the yen’s foreign exchange levels “very closely”. These comments are not that unusual for the JPY. But what analysts find concerning is that the quantity is more frequent and their tone more severe.
As for the US, the FOMC has started its meeting today. There is widespread consensus by economists and investors alike that the Fed will hold. In his press statement tomorrow at 2:15 PM, look for Bernanke to mention inflation as a concern especially at the hands of wage pressures ET. He may also mention the housing market becoming more of a concern factoring in numbers from earlier this week. Any mention of pricing pressures may strengthen the USD but it will be short-lived, barring any significant increases/decreases in the annualized GDP and unemployment claim numbers.
After that, the attention turns back to the Japanese. With CPI, household spending, and unemployment rate figures all being posted at 7:30 PM ET, expect the pairs to really move. If even one or two of the indicators show a strengthening in the Japanese economy, expect the JPY’s appreciation to be a more sustained movement to finish out the week.
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