The Japanese yen is broadly strengthening today following Federal Reserve Chair Jerome Powell's testimony to Congress, and weak domestic data. While the yen initially weakened against the US dollar yesterday, the yen began strengthening as US equity markets fell. As we wrote in our US dollar daily update, Powell's testimony raised fears of four or more rate hikes this year. Today, economic data from Japan (as well as China) is putting a dampener on risk sentiment. Japanese retail sales, housing starts and industrial production were significantly below consensus estimates, suggesting weakness in the economy. While the Japanese economy has performed remarkably well in recent times, today's figures suggest a worsening outlook for 2018. Note that Q4 2017 GDP growth was significantly below estimates. As a safe haven currency, the yen tends to rally following bad news. Our short-term and medium-term outlook on the yen remains bullish.
USD/JPY is currently trading above 107.1. EUR/JPY is currently down sharply and trading above 130.80.
Looking at Japanese economic data this week, we’ll see retail sales and core inflation figures. The leading economic index for December (107.4 vs. 108.3 expected) was below consensus estimates. MoM industrial production (-6.6% vs. -4.2% expected), retail sales (1.6% vs. 2.1% expected), and housing starts (-13.2% vs. 5% expected) were all lower than expected. Tomorrow, we’ll see cross-border stock and bond investments. On Friday, we’ll see core (ex-food and energy) National CPI, as well as unemployment figures. Last week, cross-border flows suggested a continuation of net inflows into Japan.
As the yen strengthens, we are upgrading the yen to neutral. 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.