USD/JPY has started the week quietly. In Monday’s North American session, the pair is trading at 111.75, down 0.22% on the day. On the release front, Japanese Flash Manufacturing PMI edged lower to 52.6, short of the forecast of 53.4 points. Later in the day, the BoJ releases the minutes of its monetary policy meeting, and Japan publishes the Services Producer Price Index, which is expected to improve to 0.7%. There are no US economic releases, but there are three FOMC members holding speaking engagements – William Dudley, Charles Evans and Neel Kashkari. On Tuesday, the US releases CB Consumer Confidence and New Home Sales. Federal Chair Janet Yellen will speak at an event in Cleveland.
Japanese Prime Minister Shinzo Abe called a snap general election on Monday, which will be held on October 22. The announcement was a poorly held secret, with news outlets reporting last week that Abe would make the announcement on Monday. Abe has seen his ratings improve over the North Korean crisis and hopes to take advantage of a divided opposition and an improved economy. Japan’s GDP expanded 2.5% in the second quarter, and the economy has now expanded for six consecutive quarters, as stronger global demand has boosted the manufacturing and export sectors. However, the country’s radical stimulus program, known as ‘Abenomics’, has failed to improve inflation, which remains well the BoJ’s target of just below 2.0%.
Federal Reserve policymakers have been divided over a rate hike in December, which would mark a third rate increase in 2017. With no clear message from the Fed, the markets really don’t know what to expect, and fed futures have priced in a December hike at 55%. On Monday, New York Fed President William Dudley made a strong case to raise rates. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed’s target of 2% in the "medium term", and predicted that the Fed would continue to gradually remove monetary accommodation. In last week’s rate statement, the Fed announced that it would reduce its $4.2 trillion balance sheet by $50 billion/mth, starting in October.
