Raft of data out of Japan puts yen in focus

A strong unemployment claims reading set the scene for US dollar strength but gains in the greenback still remained relatively mild.

USD/JPY was trading at around 98.30 early in Asia yesterday but has since reversed and is hanging around 99 at the moment on the back of a key day on the data front. The USD side of the equation got a minor kicker from the unemployment claims reading which showed claims for last week dropped to 305k from 310k and versus consensus for a rise to 320k.

The Nikkei and USD/JPY rallied off their lows yesterday on a headline that Japan’s government is to urgently consider reducing the corporate tax rate. The country is now widely expected to announce some sort of stimulus efforts to counter the sales tax hike. From Japan today we get August inflation data which will feed directly into BoJ expectations and poses a risk to yen crosses.

Japan’s CPI numbers came in relatively in line with consensus and didn’t show any real progress on the inflation front. The CPI reading ex-fresh food came in at +0.8% rise yoy and this is the figure the BoJ actually looks at. However, if we look at the CPI reading ex food and energy, it came in at -0.1% which actually points to further deflation. This is probably a better indication of underlying consumption as energy prices tend to be quite volatile. Either way we feel a disappointing reading will only suggest more stimulus is needed to put the inflation target back on track. Increasing pressure on the Japanese government to diversify pension holdings outside of the domestic bond market is likely to gain traction over coming weeks.

In a fresh commitment to growth policies, PM Shinzo Abe recently made comments suggesting Japan will be the place to make money again. This suggests the Abe put is in full force and we would be buyers of USD/JPY on any dips.

Risk FX pairs have been mostly in tight ranges and we continue to feel most volatility will come from the USD side of the equation. We might see some flows out of risk as traders deliberate the US budget talk situation. There is a huge raft of data due in Europe tonight including eurozone composite consumer and business confidence, while we also get reads on Italian business confidence and Spanish retail sales. We also get two different $3 billion Italian bond auctions and this will be interesting given the spike higher yesterday in the Italian ten-year bond (up ten basis points), on the back of political concerns. This will put the euro firmly in focus.

Over in the US we have a raft of Fed members set to hit the wires with Evans and Dudley being the highlights. 

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