Fundamental Forecast for Japanese Yen: Bearish
The Japanese Yen was the worst performing major currency this past week, plunging by -3.31% against the reinvigorated New Zealand Dollar, -2.28% against the AUD, and even -1.44% to the second worst performer, the US Dollar. The USDJPY’s close at ¥101.43 marks a solid >+6% rebound off of the June lows, and is a testament to the US Dollar’s resilience considering that commentary from the Federal Reserve has been an endless stream of dovishness since the June 19 FOMC meeting. But with US fundamentals improving and Japanese diet elections this Sunday, the USDJPY appears poised to run higher – and the Yen could weaken across the board.
Mainly, the volatility in Japanese financial instruments has cooled in recent weeks, and the most readily available data shows that Japanese investors poured money into foreign bonds last week, a sign that a sense that Abenomics is working is beginning to creep back into the picture.
With no minority parties likely to retain the ability to protest Abenomics – the LDP will control both the lower and upper houses of the legislature – PM Abe will essentially have free reign to proceed with phase two of his stimulative policies. We expect that a great deal of the stimulus on the near-term horizon will be fiscal in nature; and fiscal accommodation would do little to weaken the Yen further.
But a reaffirmation of the Bank of Japan’s +2% yearly inflation target alongside signs that the LDP party’s power is cemented in place could stir investors who have ignored Japanese financial instruments in recent weeks to reenter the equation. If capital outflows remain strong in the wake of the election, the Japanese Yen will weaken further.
Outside of the election, June inflation data is due on Thursday, and with a +0.1% expected, the report should show the first positive monthly headline reading since May 2012 (there haven’t been two consecutive positive inflation readings since April to May 2012). The last inflation report produced better than expected results (in the sense that policymakers are trying to stoke inflation so ‘beats’ are considered an affirmation of current policy), which helped insulate the Yen from further losses at the time. This go around, the CPI report on Thursday, if it beats again, could offer a pause in any election-related selling.
Despite the perceived notion that the Federal Reserve is now actively trying to use the communicative aspect of its monetary policy to talk down the US Dollar, US economic data supports marginally tighter policy, an affront to recent rhetoric; and this is USDJPY bullish. On the Chinese front, the People’s Bank of China’s decision to remove its lending floor has proven bullish for high beta currencies and risk-correlated assets (the Yen weakened on the news).
Finally, on the European front, Portuguese concerns are cooling as bond yields tumbled into the end of the week, while the Euro has all but shrugged off the dovish implications of the European Central Bank’s inclusion of forward guidance henceforth. Overall, it is difficult to envision a bullish Yen scenario for the coming week, and in light of exogenous forces and the Sunday elections, we hold a bearish bias. –CV