Key Factors Affecting USD/JPY Over The Summer
Quiet Summer Trading
Typically, JPY markets see relatively little movement in August while JPY itself tends to see a minor appreciation. Risk appetite is usually more moderate over the less active summer-vacation month, and USD is vulnerable to downward pressure from export hedging ahead of Japan’s mid-August Obon holiday. Hedging and repatriation of capital by institutional players on UST interest payments also tend to add downside pressure. However, despite this typical dynamic it is important to be aware that any unexpected event, even a slight surprise, can cause significant, outsized movement during thin summer trading.
JPY Tends To Outperform
In terms of this seasonal effect over August, JPY tends to appreciate around 1% against GBP, AUD & USD with GBP & AUD having fallen against JPY for 12 out of the last 17 August’s. Indeed, the latest CFTC COT positioning data shows that the large JPY short position has already started to see some position squaring which is expected to continue and deepen.
The key market focus for JPY traders this week will be PM Abe’s Cabinet reshuffle which is scheduled for Thursday. Nikkei and other key news providers are forecasting that Abe will retain key personnel at the core of his administration, including Foreign Minister Kishida, Finance Minister Aso and Chief Cabinet Secretary Suga. Abe is reportedly hoping to use the reshuffle to bolster his public support, which has dwindled in light of recent scandals, by bringing in fresh faces in other areas of the Cabinet.
The appointment of popular political figures such as former defense secretary Ishiba and Lower House Representative Koizumi would likely create a positive response, but in terms of actual polling movement, nothing more than 7% or 8% is likely.
US Important For JPY
While the domestic picture is important for the Japanese Yen, the currency has been closely affected by the path of USD over recent weeks, and the US economy remains a key determinant of price action in USD/JPY. Last week, data showed that US GDP grew a solid 2.6% year over year in the second quarter, reaffirming the picture of strong growth in the economy.
However, USD remains subdued currently given the four consecutive misses on inflation readings which the Fed acknowledged by downgrading their language on inflation at the recent FOMC meeting. The key data focus this week will be the US jobs reports on Friday with non-farm payrolls expected to have fallen back to 180k from 187k previously. Ahead of the employment reports we also get PCE data and ISM manufacturing/Non-Manufacturing so this will be an important week for determining USD direction over the rest of the summer.
Given the closing of Japan’s output gap, its large current account surplus and wariness of domestic investors towards foreign assets there is plenty of scopes to fuel a rebound in JPY over summer. US political uncertainty is also supportive of JPY as investors are becoming increasingly expectant that Trump is going to fail on or have a hard time delivering the growth-positive policies he proposed over the course of his campaign. The double failure of his healthcare reform bill stands as a warning flag for the rest of his policy agenda, and this pessimism is weighing on USD.
Technical Perspective
After failing at the 114.36 level, forming a double top, USD/JPY appears to be moving in a contracting triangle shaped range, highlighting the lack of direction in the market. For now, the focus remains on the downside and the next key level to watch will be a test of the rising trend line from year to date lows. If price breaks this formation, then Below there the key level is clearly the 2017 low around 108.61.
(Click on image to enlarge)
Disclaimer: Orbex LIMITED is a fully licensed and Regulated Cyprus Investment Firm (CIF) governed and supervised by the Cyprus Securities and Exchange Commission (CySEC) (License Number 124/10). ...
more