Talking Points
JPY strengthens then weakens after G-7
UK public inflation expectations remain steady
EUR Industrial Production
USD TICS may drive trade
Japan is on holiday with its capital markets closed, so some of the post G-7 reaction may not come until tomorrow. Nevertheless the seesaw action we saw in Asia and early Europe tonight characterizes the lack of consensus in the market regarding the near term direction in USD/JPY. The pair first dropped below the 117.00 figure on the New Zealand open after Japans FinMin Tanigaki hardly a proponent of strong yen policy noted that the recent euro/yen movements have been rough. But after having looked at the G-7 communiqué which matched last Aprils statement and dropped the annex with its overt reference for the need of further adjustment in Asian currencies, the spec accounts plowed right back into the pair in search of yield and capital appreciation. USD/JPY quickly made its way back above the 118.00 level where it once again hit a ceiling. Dollar bulls are exploiting the recent weakness in Japans economic statistics which have indicated that the worlds second largest economy continues to struggle with remnants of deflation and tepid consumer demand. With few market players afraid of any additional rate hikes from the BOJ, traders continued to sell yen nearly at will.
However, as we stated over the week-end the carry seeking speculators may be a tad too complacent in their view of G-7s true intent. While the tone of communiqué was relatively restrained it sent a clear warning signal to any trader thinking that the yen is a one way bet to the downside. For now G-7 officials appear to tolerate the present level of yen weakness, but should it cross the critical 120 USD/JPY and 150 EUR/JPY barriers the rhetoric of disapproval is likely to become far more aggressive and the jawboning from fiscal and monetary authorities will no doubt be far more explicit. Thus, we believe those who hold long USD/JPY positions should tread lightly. For the time being fundamentals are on their side but positioning is not. Yen shorts reached a record high of more than 99K contracts in the latest Commitment of Traders data on the CME and the market will need only a small catalyst to trigger a short covering rally in this massive positional skew.
One possible area of concern is todays TICS report due 13:00 GMT. Last weeks record Trade deficit had little impact on the greenback but that is because the United States economy, with the largest capital markets in the world, is far more sensitive to capital rather than trade flows. If todays data prints materially below expectations near the $50 Billion level, the fallout from the news is likely to be severe as the combination of enormous trade deficits and shrinking capital surpluses will once again raise fears about the long term structural problems of the US balance sheet. If on the other hand TICS registers a reading north of $70 Billion, those worries will dissipate for yet another month and the emboldened dollar longs may well attempt to run the stops above the 118.00 in USD/JPY.
