The yen sharply weakened yesterday following US political news. Looking at our US dollar daily update, the debt ceiling was extended and Trump announced that he will unveil his infrastructure investment program in January. In the past few days, bond yields have been rising (leading to weaker bond prices), as inflation expectations climb. Given the yen's sensitivity to bond yields (10-year Japanese government bond yields are fixed at 0% by the Bank of Japan), the yen weakens when yields rise. This morning, positive economic data (GDP growth in particular) led to further yen weakness. In the longer-term, we argued in a commentary published yesterday that markets should expect the Bank of Japan to tighten monetary policy. For now, the country maintains loose monetary policies thanks to weak inflation. Our medium-term outlook on the yen remains bearish.
USD/JPY is currently trading just above 113.50. Looking at the euro vs. the yen, EUR/JPY is up and is currently trading above 133.30.
This is a fairly light week for economic data releases relating to the yen. Consumer confidence was stronger relative to the last print (44.9 vs. 44.5 prior). The Coincident Index (0.3 vs. -1.4 prior) and the Leading Economic Index (-0.4 vs. -0.7 prior) were higher than the previous print. Cross-border stock (-¥167.1b) and bond (-¥208.1b) investments continue to result in net capital outflows. Q3 GDP growth (2.5% vs. 1.5% quarter-over-quarter annualized) and the Eco Watchers Survey (55.1 vs. 52.2 expected) were both much stronger than expected. Last week, household spending was better than expected.
As the yen strengthens on the weak inflation outlook, we are upgrading the yen to neutral in the short-term. Note that the currency is trading within normal conditions, based on technical indicators on the daily chart.
As the yen sells off on hopes for US tax cuts, we are downgrading the yen to bearish. Looking at the yen on a weekly chart, the currency is trading within normal conditions. This is based on various technical indicators when looking at a weekly chart.