Japan surges ahead as yen weakens

Asia has managed to edge higher despite limited leads from overnight trade, with the US closed and Europe mostly sidelined.

Source: Bloomberg

The Nikkei has taken off in Asian trade in a move triggered by a USD/JPY breakout. USD/JPY traded through August highs and seems to be heading towards January highs. The pair topped out at 105.44 in January and traders are likely to be eyeing this level in the near term.

This move in USD/JPY seems to have triggered greenback strength across the board as risk currencies are also losing ground to the USD. With USD/JPY pushing higher, the Nikkei is within reach of its July highs.

Heading into the BoJ meeting, which commences tomorrow, it seems the general strategy is buying dips in the Nikkei and USD/JPY. There has also been plenty of talk around a pickup in demand for Nikkei short-date calls. This might have been a key driver of the price action, given the significant outperformance of the index today.

On the economic front, it has actually been a quiet day, but perhaps the labour cash earnings reading out of Japan helped alleviate some of the fears around the economy. The reading showed 2.6% growth in July, while the market was only expecting +0.9% - this will help feed into the BoJ’s theory that inflation will rebound into the end of the year.  

Click to enlarge

RBA remains on hold

While Japan has stood out, Australia has also seen some activity with a few releases hitting the wires. Building approvals came in at a better-than-expected +2.5%, while the current account deficit was relatively in line with estimates at $13.7 billion.

Heading into the GDP reading, the dampener is the fact this reading won’t do tomorrow’s release any favours – some analysts are actually tipping a disappointment to the forecast +0.4%. The pick-up in building approvals can perhaps be attributed to residential construction, which is likely a function of lower rates encouraging borrowers.

As expected, the RBA left rates unchanged but there were some changes to the language. While the ‘period of stability in rates’ line was maintained, there was acknowledgement of the signs of improvement in business conditions and household sentiment.

However, this was balanced out by a high unemployment rate and a relatively high exchange rate. Overall, a fairly balanced statement, but acknowledgment of property-related challenges in China suggest it is a situation they are monitoring closely. China directly impacts demand for some of the commodities important to Australia and therefore developments there are always key.

As far as the AUD is concerned, we are seeing modest weakness with AUD/USD dropping below 0.9300. However, it’s hard to be overly bearish on the pair, given the international community continues to chase the AUD for yield.

Euro remains fragile

Looking ahead to the European open, we are calling the major bourses mildly firmer. We have continued to see weakness in the single currency and it seems traders remain nervous as EUR/USD approaches the 1.3100 mark. While most signs point to further weakness in the pair, it seems there is a risk of a short-term bounce, given the pair appears oversold at the moment.

Additionally, a bit of caution is perhaps warranted heading into the ECB meeting. The European calendar is very light today but there is some activity on the UK and US front. In the UK we have construction PMI whilst US trade brings manufacturing PMI, construction spending and manufacturing prices.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Een artikel zoeken

Form has failed to submit. Please contact IG directly.

  • Ik wens per e-mail informatie van IG Group bedrijven te ontvangen over handelsideeën en IG's producten en diensten.

Voor meer informatie over hoe wij uw gegevens mogelijk kunnen gebruiken, bekijkt u ons Privacy- en toegangsbeleid en onze privacy website.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.