The Yen recently enjoyed some favorable winds over the previous day as CPI and employment data was released and received favorably by markets. The labor force participation rate was up marginally, unemployment fell below 3.0% and the CPI benchmark, which is the target inflation indicator for Japan, held the line at 0.4% y/y in June. The inflation level was the highest in two years and in line with expectations.
Under normal conditions, this narrative would provide a proper backdrop for a bullish stance on any currency. However, these conditions are anything but normal. The bullishness brought on by better employment and inflation data is quickly countered by extremely dovish monetary policy and quantitative easing in Japan.
The competing economic forces that are battling it out in Japan, easy money versus solid fundamentals, explain the changing directions we have seen over the medium term in the Yen.
Further complicating things, the Dollar has weakened amid political drama, rate speculation and mixed data releases. In short, we essentially have two currencies that are weakening on a relative basis but both persist in sending mixed messages that could indicate a stronger turn. For the US, the support for bulls has been in the form of rate expectations while yen bulls could point to the glimmers of hope provided by the economic data.
With respect to potential directional signals that could provide guidance, one of the strongest correlations with the USDJPY pair is with US 10 Year rates, and as those rates have bounced around over the near term, so has Dollar/Yen.
We saw a mild jump in yields overnight and we’d expect to see structural support in the pair as a result over today as well.
In the short term, with a US GDP release this morning that is in line or above expectations, we could see a meaningful strengthening in USDJPY which could provide the basis for a new direction and a break above the clouds on an Ichimoku chart off current support levels, which also provides a “double bottom” with lows earlier in the month and a correction to the trend in a lower price we had seen over the last week.