Tanalys

Japanese Yen Rallies as CPI Shows ’Abenomics’ Working; USD/JPY Under ¥99

ASIA/EUROPE FOREX NEWS WRAP

The Japanese Yen has emerged as the top performer for the second consecutive day as further evidence that ‘Abenomics’ and the Bank of Japan’s aggressive easing strategy are starting to have their desired impact: higher inflation. Japan has struggled with deflation for the past two decades, and it is believed that rising prices could stoke a broader economic recovery.

Accordingly, with Japanese core inflation rising at its fastest yearly rate (+0.4%) since November 2008 (+1.0%), the policies seem to be having a faster than anticipated impact; and this in turn dampens the likelihood that additional aggressive easing measures are coming.

Considering that ‘Abenomic’s and the BoJ’s monetary policy had weakened the Yen by -12.63% against the US Dollar through yesterday’s close, if no further measures are likely in the near-term, a Yen rebound, from a fundamental perspective, was all but guaranteed.

With the USDJPY trading under ¥99.00, and the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) thus trading to fresh monthly lows, intermarket dynamics have seen a ‘risk-off’ theme take hold of investors overnight (see Currency Strategist Ilya Spivak’s commentary in the link below). However, the scope of USDJPY declines may not be complete with the final July US U. of Michigan Confidence report due today – rising mortgage rates are already putting pressure on the housing market, which is reducing homeowners’ equity.

Read more: Japanese Yen Gains as Liquidation Hits Asian Stock Exchanges

Taking a look at European credit, slight downside pressure in peripheral markets has held the Euro at bay versus the US Dollar, which is down solidly on Friday. The Italian 2-year note yield has increased to 1.561% (+0.8-bps) while the Spanish 2-year note yield has increased to 1.855% (+1.4-bps). Likewise, the Italian 10-year note yield has increased to 4.406% (+1.3-bps) while the Spanish 10-year note yield has decreased to 4.612% (-0.9-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 11:00 GMT

JPY: +0.76%

AUD: +0.32%

CHF: +0.17%

GBP:+0.16%

CAD:+0.09%

EUR:+0.01%

NZD:-0.01%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.23% (-0.98% prior 5-days)

ECONOMIC CALENDAR

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TECHNICAL ANALYSIS – CHART OF THE DAY

USDJPY – The USDJPY undercut trendline support off of the February 25 (Italian elections) and April 4 (BoJ announces massive easing program) lows, which is important considering their historical importance this year. Likewise, the uptrend off of the June 13 and July 11 lows cracked, and now a slight descending channel off of the July 8 and July 19 highs is guiding price action.

With the pair coming into a congestion zone over the past several months, further losses may be limited as buyers look to reenter the market in a familiar price range. As noted above, should US economic data on Friday disappoint, trade to the lower end of the range support at 96.90/7.00 should not be ruled out.

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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