USD/JPY: Points to watch in sluggish summer markets – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that they expect minimal boost for USD/JPY pair from Cabinet reshuffle, while the focus will remain on key US data.

Key Quotes

“Yen markets in August seasonally tend to see relatively little movement and a modest rise in the yen. Risk takers are less active in the vacation season, and the dollar can come under selling pressure from export hedging prior to Japan's mid-month long holidays and hedging and repatriation of funds by institutional investors on UST interest payments. Nevertheless, we should be aware that even slight news can prompt an outsized market reaction amid the thin trading.”

“The big event this week will be Prime Minister Shinzo Abe's Cabinet reshuffle set for Thursday. The Nikkei and other major media predict that Abe will retain key persons at the heart of his administration, including Finance Minister Taro Aso, Foreign Minister Fumio Kishida and Chief Cabinet Secretary Yoshihide Suga. Abe hopes to restore his public support by bringing in new faces in other posts, and some market participants feel that the appointment of popular politicians like former defense secretary Shigeru Ishiba and Lower House Representative Shinjiro Koizumi would generate a positive surprise. However, we believe a ratings boost from a Cabinet reshuffle would be at most several percentage points, insufficient to lift the USD/JPY. Still, we do not wish to put too much emphasis on domestic politics as a risk-off (bullish yen) factor. Abe has time to reconsider his policy priorities and realign his political base.”

“In the meantime, we believe USD/JPY markets will remain in the low ¥110 range while maintaining a close eye on the strength of the US economy as a market factor. US GDP was revealed last week to have grown a solid annualized 2.6% YoY in 2Q 2017. This reaffirmed the resilience of the US economy as a whole despite the softness in some data during the period. This week will feature numerous indicators of interest in gauging the sustainability of this trend, including the Chicago PMI, automobile sales, the ISM index and payroll and wage data.”

“We believe global markets have had a risk positive bias in the belief that the bright outlook for Europe and China offset the softer conditions in the US. If the data reconfirm the steadiness in the US economy, we suspect the USD/JPY will climb to ¥115-120 over the medium term.”