The Koyal Group (Sept. 16, 2013) - The Japanese Yen was the worst performing currency this past week, dropping by -1.91% to the top New Zealand Dollar, another -1.83% to the British Pound, while only a mere -0.27% to the US Dollar. Last week in this forecast I said “with the domestic tone shifting for Japan, it will be necessary for incoming growth and inflation data to remain buoyant in order for the Yen to enjoy further reprieve.” Clearly, this was not the case.
Indeed, the misses on the 2Q’13 GDP reading set the tone for a weaker Yen right from the start of trade in Asia on Monday, as signs of a weaker than expected economy leave open the door for speculation on additional easing by the Bank of Japan. As noted last week, a considerable factor for any forecasted Yen strength hinged on these growth readings besting expectations.
With the economy chugging along at an acceptable pace nevertheless (+3.8% annualized versus +3.9% expected), further chatter emerged about the prescribed sales tax hike due in the 2Q’14, with BoJ officials purportedly endorsing the fiscal measures and even offering monetary assistance should the economy see pressure. Additionally, to help offset the drawdown in consumption, the Japanese government is considering a corporate tax cut to help balance out the sales tax hike impact. In light of the fact that overall consumption here suffers – accounting for approximately 60% of Japanese GDP – these fiscal adjustments are perceived to be net-negative for the Yen.
Compounding the shakier than expected domestic picture have been positive developments on the geopolitical stage, with Russia and the US agreeing to peace talks in Geneva, Switzerland, to figure out how to strip the Syrian regime of chemical weapons. As we’ve seen over the past few weeks, any progress that reduces the threat of US military intervention has been perceived as “risk positive,” in that stocks have rallied alongside the US Dollar, while the Japanese Yen, crude oil, and precious metals have fallen. Should these tensions remain in their current state or ease further, they will likely be another negative influence for the Yen.
With little important data on the Japanese economic calendar for the coming week – only the August Trade Balance figures and the weekly domestic/foreign flow of stocks/bonds figures are of interest, and they haven’t generated truly significant price action – attention turns to the highly anticipated Federal Reserve September meeting this Wednesday.
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