After being on the wrong end of the stick last week, the US dollar is fighting back, and has posted gains against the yen. USD/JPY is testing the 95 line on Monday. US data continues to be mixed. Last Friday, PPI rose nicely, but UoM Consumer Sentiment failed to meet expectations. Over the weekend, Tertiary Industry Activity improved to 0.0%, but missed the estimate of 0.2%.
In the US, it’s a very quiet day for releases. Today’s highlight is the Empire Manufacturing Index. The markets are anticipating a turnaround from a weak reading in May with an estimate of 0.4 points. There are no Japanese releases on Monday.
The BOJ released the minutes from its most recent policy meeting, and the central bank was optimistic in tone, noting that the economy has improved. On the topic of deflation, several members said that it may be difficult to reach the target of 2% annual inflation, as deflation has proven a stubborn enemy. Meanwhile, the recent volatility on the Nikkei has bolstered the yen. The Japanese stock market has lost 20% of its value since late May, making it a bear market. Japanese equities have slumped as the BOJ has failed to address the volatility in the bond market. The yen has thus risen sharply as nervous investors have dumped their stocks and flocked to the safety of the Japanese currency. This gave a big boost to the yen which gained about 400 points last week.
Taking a look at the US, the highlight of the week could be the US Federal Reserve, which will release a statement on Wednesday. What the Fed might do with QE has become a hot issue for the markets and there is growing speculation that the Fed could tighten QE in the near future.
Currently the Fed purchases $85 billion in assets every month. The Fed has said that it won’t make a move until the US economy improves, so every strong US release seems to result in more speculation that the Fed will press the trigger. A tightening to QE is dollar positive, so any action or even hints from the Fed in this regard could boost the dollar.
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