USD/JPY has ticked higher in Wednesday trade, after gains in the Tuesday session. In the North American session, the pair is trading at 111.43, down 0.12%. The yen remains under pressure, and touched a high of 111.88 earlier on Tuesday, its highest level since July 26. On the release front, US housing data was positive. Building Permits jumped to 1.30 million, well above the forecast of 1.22 million. Housing Starts improved to 1.18 million, edging above the forecast of 1.17 million. Later in the day, Japan releases Trade Balance, with the surplus expected to rise to JPY 0.41 trillion. On Wednesday, central banks will be in focus, as the Federal Reserve and the Bank of Japan publish rate statements.
Is Japan headed to the polls? There were reports on Tuesday that Prime Minister Shinzo Abe may call a snap election next week, with the vote to be held on October 22. Abe has seen his ratings improve over the North Korean crisis and a fragmented opposition. Japan’s radical stimulus program, known as ‘Abenomics’ has failed to push inflation levels anywhere near the BoJ’s target of just below 2.0%. Still, stronger global growth as seen the economy improve in 2017, and Abe is gambling that the time is right to seek a fourth mandate. The Bank of Japan releases a rate statement on Wednesday, and a hawkish message from the BoJ could send the yen to higher ground.
The Federal Reserve will be back in the spotlight on Wednesday. There is virtually no chance that the benchmark rate of 1.25% will change, so the markets are focusing on the Fed’s bloated balance sheet, which currently stands at $4.2 trillion. Earlier in the year, the Fed outlined plans to reduce the balance sheet by not replacing some maturing bonds, starting at $10 billion/month, and gradually moving higher. This move can be viewed as a mini-rate hike, and could provide a boost for the US dollar against major rivals, such as the euro. The Fed is still debating whether it will raise rates in December, as persistently low inflation has hampered plans for a third rate hike in 2017. However, the odds of a December increase have been moving higher in September, and are currently at 56%.
