Last week's performance in the Japanese Yen was its most impressive since June, as the USD/JPY currency pair fell below 96. We generally do not see major trending moves during the summer months, so it was surprising to see prices change to this degree, given the broader lack of fundamental drivers. But this was followed by a much weaker than expected data set this week which showed that both yearly GDP figures and industrial production are progressing at disappointing rates. This creates a very bearish scenario for those holding the CurrencyShares Japanese Yen Trust ETF (FXY), and this will, at the same time, heavily favor the PowerShares DB US Dollar Index Bullish ETF (UUP). This is the expected outcome, given the effect recent events will have on the USD/JPY in sending it higher.
Specifically, second quarter GDP rose by only 2.6% for the yearly figure. This is a significant miss, given the 3.8% gains seen in the first quarter, and the 3.1% gains that were expected by the consensus. Most importantly, however, is the fact that this shows that the massive quantitative easing programs (the often-discussed "Abenomics" policies) that were established earlier in the year have not been large enough, and that more monetary stimulus is likely to be seen sometime later this year. This ultimately means that the Yen has seen its top for the year and that we are much more likely to see a period of prolonged moves to the downside.
Broad Picture Suggests Yen Weakness
Overall, the lacking aspects in the Japanese economy have prevented pricing pressures from reaching normalized levels, which means that the country's longstanding deflationary trends are unlikely to reverse any time soon. Because of this, it will soon become apparent that further injections of monetary stimulus are going to become a necessity, and a good portion of these programs will look to specifically depress the currency in order to bring additional support for the country's important export sector.
The first indication that the Bank of Japan is ready to continue injecting stimulus will likely be seen when the next decisions are made with respect to proposed increases in sales tax (from 5% to 8%). One of the most significant debates with respect to how to proceed with fiscal policy can be seen in this area, and if we do see additional impositions (higher taxes) on the consumer, one of the most stable legs to the country's economy could be removed. Post-stimulus, one of the most reliable aspects of Japan's economy has been seen in consumer spending, which shows some stark contrast when compared to the deficiencies in corporate investment (which has lagged in its activities Abenomics hopes to achieve).
Going forward, forex markets will need to pay special attention to the public statements made by the Bank of Japan and to the minutes from monetary policy meetings (for example, the report that will be released later this week), as a means for gauging the country's next policy direction. Any indication that the central bank understands its policies have done very little to achieve their intended consequences will set the Yen on a clear course to weaken against most of its major counterparts, and, at the moment, upside positions in the USD/JPY represent one of the most certain low risk, high reward trading opportunities at current levels.
FXY Chart Perspective
FXY is forming a symmetrical triangle at lower levels, so the next major trend direction will be seen once prices are able to break either the support or resistance lines. The majority of the price momentum is clearly centered on the downside, and last week's rally offers new opportunities to get back in with short positions.