The yen strengthened sharply yesterday. Earlier, we remarked that the small move in the yen was surprising given recent dollar weakness. As bond markets opened following Columbus Day, US yields fell causing the yen to weaken. Given negative yen interest rates, USD/JPY is influenced by the difference in interest rates between US and Japanese bonds. Yesterday's news headlines suggesting that Trump is struggling to build support for his tax reforms is also strengthening the yen.
USD/JPY is currently trading just below 112.40, having declined below 113 last Friday. EUR/JPY is up quite a bit thanks to subsiding fears relating to Catalonia. The pair is currently trading above 132.80.
In this week’s economic data, markets will be watching economic surveys, machinery orders and services growth and cross-border investments. Tuesday's economic watcher’s survey figures (51.3) were stronger than the last print (49.7). Machinery orders were very strong (4.4% vs. 0.8% expected), but have had a limited impact on the currency. 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 on dollar weakness and falling US bond yields, we are now bullish on yen in the short-term. 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.
After strengthening in the first two weeks of October, we are upgrading the yen to neutral. As markets continue to wait for Trump's tax reforms, the yen bear market has run out of steam. 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.