The Japanese yen has strengthened on Tuesday, as USD/JPY has posted considerable losses. The pair is trading at 101.60. On the release front, it’s a quiet day, with no Japanese events on the schedule. In the US, today’s highlight is Factory Orders. We’ll also hear from FOMC Member William Dudley. On Wednesday, the Federal Reserve will release the minutes of its June policy meeting.
Market focus on whether the Federal Reserve would raise rates has understandably shifted to the back-burner since the Brexit vote in late June. The historic referendum has had economic repercussions across the globe, including the US. What will be the effect of Brexit on US monetary policy? It may be too early too tell, but some analysts have said that the Fed might change stance and actually lower rates this year. The markets will be keenly interested in the Fed minutes, although they will have preceded the Brexit vote. Fed Chair Janet Yellen and her colleagues have sounded cautious about the US economy, and the financial instability caused by Brexit could delay any rate hikes until 2017. The US economy is in good shape, but the Fed hasn’t raised rates since last December and is unlikely to seriously consider any rate hikes unless employment and inflation numbers point upwards.
The Brexit vote to leave the European Union continues to cause deep instability in Europe and the UK and wiped out a staggering $3 trillion from global stock markets. Although the financial markets have stabilized, the British pound has shed about 11 percent since the vote, and is trading at 30-year lows. The pound’s woes have translated into strong gains for the yen, as nervous investors have headed for cover and flocked to the safe-haven Japanese currency. British politicians have sought to calm the public and the markets, but the pound’s free-fall underscores that the situation is anything but normal. The country’s political picture is in flux, as the Conservatives are choosing a new leader to replace Prime Minister Cameron and elections may follow later in the year. On the financial front, the pound has taken a beating and London’s position as a world financial center could be in jeopardy. Last week, the normally even-keel BoE Governor Mark Carney was surprisingly blunt, stating that the BoE planned to lower interest rates during the summer, and this will only add pressure on the battered UK financial sector.
Britain may have voted “Out”, but there is no timetable as to when the exit will take place or what type of trade agreement will define the new economic relationship between the EU and Britain. British leaders are in no rush to leave, but European leaders have called on Britain to exit as soon as possible in order to minimize the uncertainty and instability caused by the Brexit vote. When it comes to the EU, Britain finds itself in limbo (“neither in nor out”), and such uncertainty could continue to weigh on the currency markets until some decisions are reached regarding Britain’s exit from the EU.
Japanese indicators were mostly soft last week, underscoring a weak economy. Household Spending and Retail Sales both posted declines, as the Japanese consumer continues to hold tight to her purse strings. Tokyo Core CPI continues to point to deflation, recording a second straight drop of 0.5%. Still, the yen held its own last week, benefiting from its safe-haven status. As well, the Bank of Japan remains reluctant to adopt further easing, so the yen could continue to rise and move towards the symbolic 100 level.
Monday (July 4)
- 23:45 Japanese 10-year Bond Auction. Actual -0.24%
Tuesday (July 5)
- 10:00 US Factory Orders. Estimate -0.8%
- 10:00 US IBD/TIPP Economic Optimism. Estimate 49.3
- 14:30 US FOMC Member William Dudley Speaks
Upcoming Key Events
Wednesday (July 6)
- 10:00 US ISM Non-Manufacturing PMI. Estimate 53.3
- 14:00 US FOMC Meeting Minutes
*Key events are in bold
*All release times are EDT
USD/JPY for Tuesday, July 5, 2016
USD/JPY July 5 at 6:05 EDT
Open: 102.52 Low: 101.65 High: 102.53 Close: 101.68
- USD/JPY has posted losses in the Asian and European sessions
- There is resistance at 102.36
- 101.07 is providing support
- Current range: 101.07 to 102.36
Further levels in both directions:
- Below: 101.07, 99.71 and 98.88
- Above: 102.36, 103.73, 104.99 and 105.87
OANDA’s Open Positions Ratio
The USD/JPY ratio is showing slight movement towards short positions on Tuesday. Long positions retain a strong majority (64%), indicative of trader bias towards USD/JPY reversing directions and moving higher.