Despite recent weakness in the US dollar, the yen is only down slightly. As US bond markets were closed yesterday, USD/JPY trading volumes have been limited. Given negative yen interest rates, USD/JPY is influenced by the difference in interest rates between US and Japanese bonds. Earlier last week, we warned that USD/JPY was looking overbought and thus vulnerable to a pullback. Today, the pair is somewhat stretched but no longer looks overbought. News has been limited, as yesterday was a public holiday in Japan. We downgraded our short-term outlook on the yen to neutral yesterday.
USD/JPY is currently trading just above 112.50, having declined below 113 last Friday. EUR/JPY is slightly up this morning. The pair is currently trading above 132.50.
In this week’s economic data, markets will be watching economic surveys, machinery orders and services growth and cross-border investments. Today's economic watcher’s survey figures (51.3) were stronger than the last print (49.7). We'll get machinery orders numbers tomorrow. On Thursday we’ll get the tertiary industry index and cross-border stock and bond investments. Given relatively strong survey data from Japan recently, investors will be looking for signs that economic growth is continuing.
After rising sharply on the morning of October 4, we are now neutral on the yen. The currency had previously entered oversold conditions, and was due for a technical pullback. Earlier, the yen sold off on strong Japanese economic data (tankan surveys) and rising interest rate differentials against other currencies.
The yen has sold off for three consecutive weeks in September, and our medium-term outlook on the currency remains bearish. As political risks subside in the Korean Peninsula and expectations for interest rate hikes grow in the US, the yen has encountered a bout of weakness. Looking at the yen on a weekly chart, the currency remains far from overbought or oversold levels looking at various technical indicators. Thus trading conditions remain normal.