Week in FX Asia – Safe Haven Flows Drive USD/JPY Below 108

  • Lower global growth and Fed inaction make JPY a safe haven
  • Bank of Japan confident on economic recovery
  • Japan Had The Biggest Cut to Growth Forecast by IMF

The diverging monetary policies between the Bank of Japan and the US Federal Reserve have pushed the USD/JPY close to the 110 price level only to quickly drop to below 108 as the Fed Minutes from the FOMC appealed to having patience regarding an interest rate hike in the US. Japan on the other hand continues to suffer from the effects of the sales tax hike introduced in April. Abenomics made a bold entrance into the lexicon in early 2013 after the firing of the first arrow of monetary policy. Second and third arrows have been so far ineffective and the market awaits the BOJ for a follow up after an uneventful 2014.

The Federal Reserve in the United States and the Bank of England are the two major central banks currently sharing the lead on interest rate hikes. The BOE took the lead only to have Governor Mark Carney recant, which hurt him in the view of the British parliament. The Fed continues to stall the market by not giving a clear schedule even though Chair Janet Yellen did let it slip during her first press conference that the central bank could raise rates as early as six months after the end of the bond-buying taper. That would bring it to fall of 2014, so the tightening cycle could begin in spring 2015. Fed members have issued statements that the central bank needs to be patient and raise only when necessary.

The other group of central banks is formed by the European Central Bank and the Bank of Japan. The ECB is fighting a deflationary environment as growth has proven elusive for the euro zone. In order to launch a quantitative easing program european leaders have to agree and that is the biggest challenge facing the EU. Germany continues to push an austerity agenda that runs counter to much needed stimulus.

The Bank of Japan was a strong supporter of Abenomics in 2013. This year was a different story as the central bank remained in the sidelines. An increase in stimulus is expected from the BOJ. This week Governor Kuroda was confident on the economic recovery of Japan even though he admited that the April sales tax hike had a temporary effect on growth. He stressed that the central bank is ready to act if needed to reach the 2 percent inflation target that is at the core of Abenomics.

Not so bullish on the Japanese economies are the IMF, World Bank and the OECD. The IMF cut global growth forecasts this week with Japan singled out with the largest cut. The IMF’s forecast for 2014 is 0.7% while the 2015 forecast slightly better at 0.8%. Both forecasts where 0.2 points here before the updates.

Next Week For Asia:

Top events for the region: Chinese Trade Balance and Australian Business Confidence on Monday. Bank of Japan economic outlook on Tuesday. Chinese CPI on Wednesday. FDI into China on Thursday.

North America and Japan have a short trading week with Monday being a bank holiday. China kick starts events with the release of their trade numbers on the weekend. Most of the week will be dominated by price reports from the U.K, China and Canada. By Tuesday, investors get to gage business and economic sentiment from Australia and Germany. On Wednesday, Draghi is due to deliver opening remarks at the 7th Statistics Conference in Frankfurt. Volatility is often experienced during his speeches as traders attempt to decipher interest rate clues. The US delivers key sales numbers, weekly claims and rounds off the week with consumer sentiment and Fed Chair Yellen speaking in Boston.

Fore more market moving events visit the MarketPulse Economic Calendar


* GBP Core Consumer Price Index
* EUR German ZEW Survey (Economic Sentiment)
* CNY Consumer Price Index
* USD Advance Retail Sales
* CAD Bank Canada Consumer Price Index Core
* USD U. of Michigan Confidence

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza