Fundamental Analysis

Yen Gains Ground on Barcelona Jitters

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USD/JPY has edged lower in the Friday session. In North American trade, the pair is trading at 109.11, down 0.25% on the day. On the release front, UoM Consumer Sentiment improved to 97.6, beating the estimate of 94.0 points. There are no Japanese events on the schedule.

It's been a busy week for the Japanese yen, which has showed volatility in response to geopolitical events. The yen lost ground early in the week, as tensions between the US and North Korea eased after reaching a fever pitch last week. This trend didn't last long, however, as investors have once again snapped up the safe-haven yen following a deadly car-ramming attack in Barcelona on Thursday. The terror attack killed 12 and wounded dozens, and the yen responded with gains on Thursday.

In the US, political risk continues to weigh on the dollar. President Trump's administration continues to spend most of its focus and energy on damage control, and the latest fiasco for Trump has been the alt-right protest in Charlottesville, where one protester was killed by a suspected white supremacist. Trump's belated condemnation of white supremacists and his insistence on blaming the violence on both the white supremacists and the counter-protesters has drawn wall-to-wall criticism from both Democrat and Republican lawmakers. Trump remains defiant and continues to attack his critics, but the events around Charlottesville have only served to tarnish his image and raised growing concerns about his presidency.

The Japanese economy continues to show improvement in 2017, and this was underscored as Preliminary GDP in Q2 gained 1.0%. Japan has now posted a sixth consecutive of growth, marking the longest expansion in over a decade. A stronger global economy has boosted the export sector and domestic demand has rebounded. With a tight labor market and the business sector confident about economic conditions, better times could continue in 2017. The fly in the ointment remains inflation, as BoJ's ultra-easy monetary policy has failed to eliminate the threat of deflation. The BoJ has insisted that it will not tighten policy before inflation climbs closer to the bank's inflation target of 2%, but clearly this goal is unrealistic in the short term, and the BoJ may have to lower its inflation target.

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MarketPulse
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