The yen remains very much the main focus in the foreign exchange market as the dollar fell 1.25% against the yen last week, while rising against all the other major currencies, notes the research team at BBH.
“It has fallen each day this week, and earlier today fell to a low near JPY106.85, its lowest level since November 2016. The recent yen moves appear to be led by Japanese-based investors. It could be increasing hedge ratios. It could be reducing new buying of foreign securities. Some link recent yen strength to efforts to curb retail leverage.”
“Thus far the reaction from Japanese officials has been quite modest. It jives with our understanding that at least some officials can accept a rise in the yen, provided it is gradual and part of a broader move in the foreign exchange market. The yen's strength is not simply against the dollar. It is appreciating on a trade-weighted basis. In fact, with today's gains (~0.7%), it has appreciated for the seventh consecutive session on a trade-weighted basis. Over this period, it has appreciated by more than 3%. The pace and breadth of the yen's appreciation would seem to challenge Japanese official resolve.”
“However, given the attitude of the US Administration, Japanese officials will tread carefully. The OECD, for example, considers the yen the most undervalued currencies on a PPP-basis (~9.75% undervalued at JPY107.50). Also, Japan has a current account surplus of around 4% of GDP last year, up from less than 1% in 2013-2014.”
“Separately, Japan’s first estimate of Q4 17 GDP was disappointing. The economy appears to have nearly stagnated, with the q/q pace of 0.1% in real terms and flat q/q in nominal terms. The bright spot was consumption (0.5% after -0.6% in Q3), but business spending was weaker than expected (0.7% rather than 1.1%). Public investment and residential investment fell, while trade was a net wash. The GDP deflator, which some suggest may be a better measure of inflation than CPI, was flat after a revised 0.2% gain in Q3 17.”
“Stops apparently were triggered on the break of JPY107. The reactionary bounce that also began in Tokyo is running out of steam in the European morning near JPY107.50. If the JPY106.80 area is taken out, the next chart level is in the JPY106.40-JPY106.60 area, but many will set their sights on JPY105.”
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