Preparing For the Deluge of Japanese Data

Okay, it's time to start getting ready for the deluge of Japanese data we're about to see.

Yesterday afternoon and evening, I looked at the implications of the RBNZ's rate increase, as well as economic data coming out of Great Britain. I felt that the British pound was pushing towards the "egregiously over-valued" level. More so, I felt that the currency would fail in finding new buyers up above the $2.0000 level. Woke up this morning, and I guess the entire market agreed with me.

Most attributed the moves in the currency market to getting out of spec positions before the GDP release tomorrow. I'm not so sure about that. It just doesn't add up. Everyone was short dollars, and yet the GDP is expected to be softer, showing the U.S. economy is sluggish. So, why would you get out of short dollar positions in front of a trade like that?

But, the real entree for this week is the Japanese data we're about to get. This data may very well set the tone for the currency in the next few weeks. In order to see where we are heading, let's see where we have been. Here's a look at Industrial Production, GDP, Unemployment, and CPI.

Okay. Looking at U.S. data, whenever Industrial Production pushes higher, it is actually a result of higher incomes, and therefore consumption. With regards to Japan, this could also be a result of higher consumption coming from abroad. Nonetheless, the IP release appears to have a bit of some upward bias to it. There's also a direct correlation to GDP. Again, this comes from experience looking at data from here in the U.S. and other countries. Again, the bias is slightly upward. But, we won't be getting GDP figures out today, but are getting retail sales.

Next we get unemployment. The trend in unemployment is moving moderately lower and lower. That corresponds to movements higher and higher in both IP as well as GDP (more people employed to consume products). So, the unemployment release could easily lean towards slightly more growth in Japan.

Lastly, CPI. I doubt we'll see some of the increases in CPI like what was seen in New Zealand and Great Britain. Just doesn't seem likely. All the money from Japan is sitting in foreign banks earning a better interest rate. In fact, the last release came in softer, and I wouldn't be surprised to see the same happen again, except for one thing, the price of oil. That could push the CPI rate up.

The Bank of Japan also meets, although they will sit on their hands until after the July elections.

In all, I think the tone that I expect to see coming out of Japan is that the economy is still moving towards firmer footing. That's what we are seeing in the releases above, and there's probably good reason to expect the same tonight. I am betting that the data comes in without much bang, however. But, the overall tone, when looked at collectively, could sway some to think that there is reason to see higher interest rates in the future. I am specifically looking for the overall tone instead of one killer release.

What does that mean? Depends. There. I'm off the hook. No, really. If the tone is that things are improving and continually building, then the take is going to be that there's room for interest rates. No doubt, the Bank is very likely to want to pick interest rates up off the ground if possible. If that's the case, USD/JPY is very likely to see some offers come in. I'm not so sure that the end of the carry will start tonight. But, after last night's moves, there seems to be some kind of movements in the cards for Friday. If the JPY starts to rally tomorrow, and the GDP release comes in soft as expected, that will very likely just push USD/JPY further lower. We may see some movements similar to what we saw at the end of February.

But, if the tone is mixed, then the reaction could very likely be muted. Heavily muted. But, I have a feeling, we'll see some movements regardless. Nonetheless, the bond market over in Japan is starting to position themselves for more rate increases. Currency traders should start to do the same.