Talking Points
JPY Tertiary surprises to the downside
JPY LEI revised downward
EUR inflation in line
USD CPI on tap
Has the BOJ lifted ZIRP prematurely once again? Thats the question facing traders tonight as Japanese economic news produced weaker than expected results, suggesting that the much anticipated recovery may be in jeopardy. Japan's Tertiary index, which measures activity in the services sector, fell -0.2% after a downwardly revised drop of -0.8% in July. Activity has now fallen in four out of the last six months prompting fears that the BOJ rushed to judgment in ending its ultra loose monetary policy this summer. The dour economic outlook was further reinforced by a sharp downward revision in the LEI release which was marked down materially to 27.3 from its initial reading of 40. Talk on dealing desks is now centered on whether Governor Fukui may have to pull a Hayami a reference to the former BOJ Governor who had to reverse course on rates in 2000. While we seriously doubt that BOJ will be forced to roll back rates to zero, tonights data clearly suggests that the chances of yet another rate hike before the year end have declined substantially. Not only are the monetary policy makers facing the prospect of a global slowdown in demand, which is likely have a disproportionate economic impact on export driven Japan, but the countrys internal political situation may also impede further reform. News tonight that General Affairs Minister Takenaka is resigning from the Upper House certainly should raise concern for yen bulls. Mr. Takenaka was a key reformer in the Koizumi administration and his departure indicates that the consensus candidate, Mr. Shinzo Abe, will follow a far more conservative policy path.
In short, as we approach the G-7 meeting this weekend yen longs have few positives to look forward to. Unless the ministers produce an aggressive communiqué calling for meaningful rebalancing of Asian currency exchange rates a scenario that almost no market player believes will occur the yen will continue to flounder as carry traders will dominate trade in the absence of any catalyst to trigger a short covering rally. Little wonder then that USD/JPY weakened further as the European session began with the pair inching towards the 118.00 level.
For yen bulls their best hopes lay in positioning. With the Commitment of Traders report showing a massive skew towards yen shorts, it will be interesting to see the latest data due at market close today. If the number of yen shorts has increased, the upward path for USD/JPY will be limited unless economic news becomes markedly worse. With sentiment already so sour it will take progressively greater negative news to generate further rallies in the pair. Nevertheless, tonights economic data suggests clear structural problems in the Japanese economic recovery story as the consumer continues to be mired in the deflationary mindset. Perhaps, the better than $15 drop in the price of crude will spark a rebound in discretionary spending, but for now, both the question of the sustainability of the Japanese recovery and certainly the prospect of further rate hikes by the BOJ are very much in doubt.
