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USD/JPY Fundamental Daily Forecast – Stock Market Weakness Fueling Carry Trade Selling

James Hyerczyk
With risk off today, the direction of the Dollar/Yen will be determined by the size of the buying moving into the Japanese Yen and the Dollar. Money is flowing into each currency for protection. Stock market weakness is fueling the carry trade which is pushing money out of stocks and into the Yen as investors pay back margin loans to Japanese banks. 

The Dollar/Yen is trading lower early Friday in response to stronger-than-expected Japanese economic data, but buyers are attempting to claw back earlier losses in reaction to geopolitical tensions.

At 1155 GMT, the USD/JPY is trading 110.926, down 0.164 or -0.14%.

Japan’s economy expanded at an annualized rate of 1.9 percent in April-June, bouncing back from a contraction in the previous quarter, government data showed on Friday, in a sign its recovery momentum remained intact.

The preliminary reading for second-quarter gross domestic product (GDP) compared with a median estimate for a 1.4 percent annualized increase. It followed a revised 0.9 percent annualized rate of contraction in the first quarter, the Cabinet Office data showed.

In other news, the Producer Price Index (PPI) came in at 3.1%, versus a 2.9% estimate. The previous reading was 2.8%.

Traders Concerned About Geopolitical Risk

Geopolitical turmoil in Turkey is helping the Dollar/Yen recover some of today’s earlier loss. USD/JPY traders are also responding to weakness in the Euro which is being fueled by fears that events in Turkey will put a few Euro Zone banks at risk.

According to reports, the European Central Bank (ECB) is concerned over the impact of a weak Turkish Lira on European banks. The Financial Times said earlier in the session, the Lira’s depreciation could hurt European banks such as Spain’s BBVA, Italy’s UniCredit, and France’s BNP Paribas in particular.

The reported was discredited by Timothy Ash, an economist covering Emerging Europe, Middle East Africa. He also focuses on Ukraine, Russia and Turkey.

Speaking to CNBC’s “Squawk Box Europe” Friday, Ash said the FT report was “sensationalist” as any losses incurred by the banks would be by local subsidiary branches who had invested using Turkish Lira and not U.S. Dollars.

Ash added however that while banks in Turkey remained in reasonable shape, the country did have a problem with its balance of payments that has occurred because the economy had been allowed to overheat.

“Ultimately now, there is zero credibility in the Central Bank of Turkey and zero credibility in Turkish policy making. Whatever they do, the market doesn’t believe them,” Ash said.

With worried investors moving into U.S. Treasury instruments for protection, U.S. rates are plunging. This may be helping to limit the Greenback’s gains against the Japanese Yen.

With risk off today, the direction of the Dollar/Yen will be determined by the size of the buying moving into the Japanese Yen and the Dollar. Money is flowing into each currency for protection. Stock market weakness is fueling the carry trade which is pushing money out of stocks and into the Yen as investors pay back margin loans to Japanese banks.

This article was originally posted on FX Empire

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