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Yen Rebounds On Noda Warning, FOMC in Focus

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Top Stories

  • Noda warns on strong yen
  • German Trade improves markedly
  • Nikkei loses 0.72% on strong yen, but Europe rallies 1.4% on open
  • Oil at $81.35/bbl
  • Gold nearly $1210/oz.

Overnight Eco

  • AUD ANZ Job Advertisements m/m 1.3% vs 2.8%
  • AUD Home Loans m/m -3.9% vs. -2.1%
  • JPY Bank Lending y/y -1.8% vs. -2.0%
  • JPY Current Account 1.36T vs. 1.44T
  • JPY M2 Money Stock y/y 2.7% vs . 2.9%
  • JPY Economy Watchers Sentiment 49.8 vs. 48
  • EUR German Trade Balance 12.3B vs. 12.4B

Event Risk on Tap

  • USD Loan Officer Survey

Price Action

  • USD/JPY rises to 85.60 off Noda's comments
  • AUD/USD hovers near 92.00 at start of week
  • GBP/USD 1.6000 still resistance ahead of possibly weaker UK data this week
  • EUR/USD run to 1.3300 fails to hold, but supportive TB data could spur another go

With the exception of the yen, the dollar remained relatively weak against the majors at the start of trading for the week as Friday's disappointing NFP numbers continued to weigh on the greenback. USD/JPY however rallied to 85.65 in early European session after Japanese Finance minister Yoshihiko Noda used the monetary policy makers version of a "brushback pitch" by stating that he was monitoring the currency market closely and that, "Excessive, disorderly foreign exchange moves would have adverse effects on the stability of the economy." Japanese officials are clearly becoming concerned about yen strength and its impact on the country's vital export sector as the pair approaches the key 85.00 figure. Most Japanese corporates can probably withstand the current exchange rate levels, but the fear amongst policymakers is that a decisive break below 85.00 would trigger a move towards 80.00 or lower which would materially compress Japanese profit margins not only in the US market but in China as well which remains on de facto dollar standard.

Complicating matters further is the fact Japanese are beginning to experience problems with their Current account surplus in addition to the trade flows issues caused by the stronger yen. Today's disappointing Current account data which printed at 1.36T versus 1.44T forecast indicated a severe deterioration in the income account as US treasury yields have fallen to multi decade lows. Japan now finds itself in an unenviable position of seeing its exports suffer due to strong yen appreciation while its income flows decline due to falling US yields. Yet in the end Japanese monetary officials have few policy choices available to them. It is highly unlikely that the BOJ will initiate intervention on unilateral basis, and even if it does it is unlikely that it will succeed on anything but a temporary basis. Yen's current strength is solely a function of US economic weakness and until US growth improves the dynamics for USD/JPY continue to suggest lower prices ahead.

Euro meanwhile held its own for most of the night boosted by strong German Trade Balance data. Germany Trade Balance expanded to 12.3B surplus from 10.6B the month prior with exports rising a healthy 3.8%. The gains in trade were aided by favorable exchange rate differentials with the single currency a full 10% lower in June than now. As we noted earlier, "it remains to be seen if Europe's largest economy can maintain this pace of export growth with the euro at the current levels."

Despite running into a wall of profit taking on its attempt to run the 1.3300 barrier earlier in the night, the unit remains well bid as EZ economic fundamentals continue to show positive divergence from the lackluster US data. With no major economic releases on the docket for the rest of the day, the pair may continue to consolidate ahead of the FOMC meeting tomorrow. We expect to see no material change in the Fed's communiqué, which may spur a relief rally in the dollar, but ultimately as the week progresses, the FX market will continue to focus on US economic news and if the data produces yet more disappointment the euro could climb towards 1.3400 as anti-dollar sentiment intensifies further.

FX Upcoming

Currency GMT EST Release Expected Prior
USD Loan Officer Survey

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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