Eastern Traditions: Yen in the Favorite Trend

Bank of Japan last meeting protocols are incredibly positive
We would like to wish each currency such domestic tranquility as present-day Japanese yen demonstrates. BoJ last meeting protocols are incredibly positive: the political course has been preserved, stimulation continues, private consumption is stable, exports are growing, business climate is getting normalized. All the macroeconomic factors have been considered in long-term prices, certainty with regard to inflation growth is advocated, and indicators will only improve; that is why there is no need for Japan to hurry. There is a tendency not to speak about the future price dynamics; however, according to Kuroda's words, the annual PPI growth is bound to grow in fall when the effect of low oil prices must decrease. Is everything really so well? Let's note several factors:

  1. Japanese QE keeps its scope (80 trn) with the possibility of growth. The dates of ending the process of pumping the Japanese liquidity market have not been voiced, but the market, as early as at the beginning yen decline have included very large volumes of injections into the rate. Results - as promising as protocols may look, the present situation is unstable, and yen is dangling in the range of 118.5 - 121.00, although logically - it is bound to go upward.
  2. The balanced and stable 2% inflation is still far away; however, most of Board of Directors still support Kuroda. Today, this main indicator is at zero level; however, there is a strong suspicion that monthly inflation may well drop to minus values (there is no stable growth). Meanwhile, it does not worry Japanese officials, everybody strongly believes that the main reason of the current weak inflation are global prices for energy resources. Results: they are stubborn to see the low rate of economy recovery after recession.
  3. Central Bank's advertised attempts to rock the inflation encounter a number of diverse problems: from the decrease of retail sales and industrial production to large private companies being uncertain about economic perspectives. Results: corporations, mainly, retain deflation thinking and are not in a hurry to increase basic salaries.
  4. Japanese households, along with investors, begin to restructure portfolios in favor of foreign assets, and that is another risk for yen. The active rally on the Japanese stock market, growing dynamics of Nikkei 225 and Topic, the Japanese activity on the American debt market serves as the yen growth driver. Results: in January only, Japanese participants purchased more than 1.065 bln yen worth of American bonds - it is the highest since summer 2014.
  5. The reason of yen strengthening may be a drop in appetites for risk or large interventions on the part of Japanese officials as the response to the negative from weak yen by small, medium businesses and households.

The factors that contribute to cheapening of the Japanese currency may include:

  1. The possibility of US economy real growth is stronger than present-day expectations.
  2. As oil prices and capitalization of oil-mining companies continue to decline, it kills the ideas of purchasing stocks and affects S&P500 and main stock indexes, taking main advantages with regard to USD/JPY from "bulls".
  3. Extension of time for increase of American rates to the end of the year.

Today, the currency market has practically no variants with regard to yen, although now USD/JPY pair hangs in the middle of the mid-term channel. On Monday, the comments made by the advisor on economics Hamada (who has been always notable for his "bullish" sentiments) caused a small shock with USD/JPY bulls. It is not clear yet if his statement can be considered as his personal opinion or a purposeful verbal intervention. The response was volatile but had a quick pullback. While the pair was being steadily adjusted from 120.80 level, the statement with regard to "suitable" 105.00 rate dropped it drastically, and bids in 119.70 zone suspended its decline; however, the attempts of the current growth have attracted large sellers. The present-day Asian session has not clarified the picture, the pair confidently stays at 119.90 level with the bullish goal for 121.50. We can see the buyers' intention for dollar strengthening under the influence of the upcoming American and European statistics and positive dynamics at the Japanese stock exchange. Yen does not yet have any serious factors for the reversal of its upward movement.

Author: Navsher Bartash,
ForexChief Currency strategist