The Japanese yen continued to move with the ebb and flow of equity markets, as a surge in risk aversion early in the week sent carry trades plunging before renewed market optimism reversed the sentiment. Economic data out of Japan was broadly mixed, as Tokyo CPI was slightly stronger than expected, but showed that the Bank of Japan is still grappling with deflation. The jobless rate was also encouraging at a nine-year low of 3.6 percent, however, tight labor markets have yet to give consumers enough spending power to boost purchases. We saw this feed into the July retail sales report, which plummeted 2.4 percent and was exacerbated by the combination of an earthquake, a typhoon and higher taxes.
As it stands, there are really only two fundamental events that could perpetuate a strong move by the Japanese yen: a rate hike by the Bank of Japan or a jump in inflation - neither of which we'll see this week. Nevertheless, traders should be aware of the Japanese economic data on tap this week, as the results could have an impact on future policy decisions by the BOJ. Capital spending is anticipated to remain strong, but show a slowdown from the quarter prior, while wage growth is predicted to soften further, which will not bode well for consumer spending. With two drivers of economic growth - business investment and consumption - showing diminishing power, the picture does not look good for Japan. Regardless, USDJPY price action will likely remain contingent upon risk aversion trends, and now that Fed Chairman Ben Bernanke has somewhat assured investors that he will support the markets in times of distress, carry trades and equities could resume their gains next week, with a break above trendline resistance at 116.93 targeting 119.34. - TB
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