The Japanese yen has paused in the Wednesday session, after posting strong gains on Tuesday. In North American trade, the pair is trading at 109.32. On the release front, US Crude Oil Inventories posted a surplus of 3.3 million, surprising the markets, which had forecast a drawdown of 3.1 million. Japan releases Final GDP later in the day, with the markets expecting a strong gain of 0.6 percent. As well, Japan’s current account deficit is expected to narrow to JPY 1.62 trillion. On Thursday, the US releases unemployment claims, with the estimate standing at 241 thousand.
As a save-haven currency, the yen tends to gain ground in periods of uncertainty, and unpredictability in Europe this week has boosted the Japanese currency. The ECB meets on Thursday to set interest rates, and reports that the central bank could lower its inflation forecast has unnerved investors and sent the euro lower. The UK is holding elections on Thursday, and what looked like a cakewalk for Theresa May just a few weeks ago has turned into a tight election, as recent terror attacks in Manchester and London have turned the political landscape upside down. Although May’s Conservatives are clinging to a lead, a hung parliament, in which no party garners a majority, could throw the country into more political uncertainty. The yen has climbed 1.2% in June, as USD/JPY is at its lowest levels since April 21.
Japan’s economy continues to improve, and stronger numbers have buoyed the yen. Wage growth posted a solid gain of 0.5% in April, rebounding from a 0.3% decline in the previous release. The dollar has dropped below the 110 level for the first time since April 25. Stronger global demand has boosted the economy, notably the export and manufacturing sectors. The markets are predicting that Final GDP will be revised upwards to 0.6%, better than the 0.5% gain in Preliminary GDP. If Final GDP matches or beat its estimate, the yen rally could continue.
The Federal Reserve is widely expected to announce a rate hike next week, which would mark the second quarter-point increase in 2017. Even a shockingly soft Nonfarm Payrolls report last week hasn’t put much of a dent in these expectations, with a rate hike currently priced in at 91 percent. Another rate hike by the Fed would mark a vote of confidence in the US economy, but Fed policymakers continue to have some concerns. Inflation remains stubbornly low, despite a labor market that remains close to capacity. Fed policy makers are also scratching their heads over soft consumer spending, which has not kept pace with high levels of consumer confidence. As for additional rate hikes in the second half of 2017, the markets remain skeptical, with the odds of a September rate hike at just 22%. However, stronger economic numbers in the third quarter could easily increase the likelihood a September hike.
