Driven by today’s sizable rally in the Nikkei and persistently strong US economic data, the USDJPY is trading higher and could sustain another push back to the all-important 100 level in the near term.
The last trading day of the first half saw USDJPY take out the 99.00 figure in late-Asian and early-European trade after a 3.5% jump in the Nikkei and renewed demand for new toshin funds helped buoy the pair.
USDJPY rose steadily throughout Asian trading, helped by the strong rally in the Nikkei and seemingly unaffected by the rather mixed economic data out of the region. The latest Japanese data showed that unemployment ticked up to 4.1% from 4.0% expected, household spending contracted sharply (-1.6% vs. 1.4%), and inflation held steady, as expected, with national CPI at 0.0%.
There were some bright spots, however, as retail trade increased markedly, printing at 0.8% from 0.2% forecast, and industrial production improved as well.
Overall, the market took its cues from the gradual improvement in corporate-sector activity, reasoning that an increase in profits will eventually translate into broader consumer demand.
However, the primary reason for the USDJPY recovery this week has more to do with US data rather than any events across the Pacific. As the week progressed, US data has produced consistent upside surprises, calming the equity markets and convincing investors that US growth remains on track.
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Next week is likely to prove pivotal for the USDJPY, as markets will get a slew of important economic data, including ISM manufacturing and services and the all-important non-farm payroll (NFP) report on Friday. If the news out of US continues to prove positive, USDJPY could retake the key 100.00 barrier as the jitters that dogged the pair for most of June will begin to disappear.
Elsewhere today, price action was generally muted, with EURUSD holding steady at 1.3050 after German retail sales showed a bit of rise on a month-over-month basis, confirming the steady growth in Europe’s largest and most important economy.
Today's North American session has little in terms of event risk, with just the revisions to University of Michigan confidence survey and Chicago PMI data on tap. If the Chicago PMI beats the forecast, traders may take it as a proxy for the broader ISM manufacturing report next week, and that could push USDJPY towards 99.50 as the day progresses.
By Boris Schlossberg of BK Asset Management