Post Holiday Blues and the Dollar – Yen

A majority of the markets opened on Tuesday, adding some much needed volume and liquidity to the markets, though we don’t expect any major moves in the early part of the week, many taking the opportunity to take a break ahead of what is likely to be another chaotic year ahead.

The Dollar saw some softness against the Yen on Monday, thin volumes leaving the Dollar mixed against the majors, with the Dollar Spot Index easing 0.1% through the day, while Monday’s declines were reversed through the Asian session Tuesday, the Dollar Spot Index up 0.08% at the time of the report, with the Dollar up across the board against the majors, the Yen leading the declines, down 0.21% at the time of the report, reversing Monday’s 0.2% gain.

Economic data out of Japan this morning included November core consumer prices, which continued to decline and a relentless decline in household spending, both of which are likely to be of further concern for the BoJ.

The November monetary policy meeting minutes released on Monday morning could be considered to be relatively upbeat, the Board taking a more optimistic view of the Japanese economy, the weaker Yen being a contributory factor to expectations of increased demand for Japanese goods in the months ahead, with global economies also considered to have seen a pickup in momentum.

This morning’s figures suggest that the BoJ remains some way off being in a position to reduce purchases of 10-year JGBs, despite one Board member supportive of some form of tapering.

Added into the mix is Trump’s inauguration in the New Year and his foreign policy intentions. The appointment of Navarro to head up a newly created trade council, with Wilbur Ross as the new trade chief, certainly spells trouble for U.S trade partners, the U.S having already pulled out of the TPP Agreement.

The optimism from the BoJ may well be short lived should the Japanese fail to get the U.S support it has become accustomed to and the Yen may receive some unnecessary attention should Trump, Navarro and Ross go ahead with a new Trade War with China, which may go beyond trade alone, Trump clearly intent on ruffling China’s feathers.

Either way, the BoJ and the Japanese government are going to need to find a way to spur household spending, which continues to weigh on the economy. Household spending fell by 1.5% year-on-year in November, the decline coming despite disposable income rising by 1.4%.

While the slide in the Yen, since Trump’s election victory has led the BoJ to take a more positive outlook on inflation, November’s core consumer price index fell by 0.40% according to data released this morning and without a rebound in household spending, not only will inflation continue to lag well behind the Bank’s 2% target, but economic growth prospects will also remain on the weaker side and heavily reliant on trade partners including China and the U.S.

Economic data out of the U.S this evening includes December’s CB Consumer Confidence figure, together with October house price index data. The markets are likely to brush aside house price data, focus being on consumer confidence, which is forecasted to see further upside in December supporting the Dollar ahead of this evening’s release.

A Dollar at ¥120 is certainly a reasonable forecast over the near-term, the only question now being at what stage the BoJ will need step in, anything beyond ¥125 likely to lead to speculation of the BoJ needing to stabilize the Yen. What a difference a president makes, the Yen having hit sub-¥100 levels back in August.