After strengthening last Friday, the yen has been trading flat this morning. Looking at interest rate differentials, US bond yields are holding steady today after rising sharply on Friday. Despite US inflation data missing estimates (weakening the case for the Federal Reserve to hike interest rates), expectations regarding Trump's tax plans are up thanks to growing Republican support. As the US dollar strengthens, the yen is less likely to keep strengthening.
USD/JPY is currently trading just below 111.80, having declined below 112 last Friday. EUR/JPY has been down for the last three sessions, thanks to ongoing political concerns in the EU. The pair is currently trading below 131.80.
This is another fairly light week for Japanese yen data releases. On Wednesday, we’ll get trade balance figures (including exports and imports) as well as cross-border stock and bond numbers. On Thursday, we’ll see industry activity data. Given the upcoming elections on October 22 (this coming Sunday), markets will be watching election news closely. As per our last update, the Party of Hope (the new opposition party founded by Tokyo’s current Governor) appears to be losing momentum in the polls.
After the yen strengthened on October 12 and 13, we are now bullish on the currency in the short-term. The yen 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.