Yen strengthens on Unexpected Boost In Consumer Spending

Yen strengthens on Unexpected Boost In Consumer Spending
October 8, 2018

 

The Japanese yen is gaining modestly against its counterparts today, after new economic data released last Friday indicates the country’s economy is marching forward steadily. However, the International Monetary Fund (IMF) published a report that suggested Tokyo avoid taking the victory for granted.

 

Household spending and IMF warning

The Statistics Bureau of Japan reported that household spending increased by 2.8% in August, surpassing economists’ expectation of a 0.1% decline and recording the second successive month of gains, which is the fastest annual pace since 2015 as clients used their considerable summer corporate bonuses to purchase a variety of goods.

A tightening labor market has enabled Japanese consumers to increase their spending, which is extremely important for the Japanese economy as services account for nearly half of the economic activity. With rising domestic demand, economists say that it could negate likely negative effects of the US-China trade war and the natural disasters that occurred this summer.

In other economic data, the Ministry of Internal Affairs and Communication (METI) stated that industrial output rose 0.7% in August, the first production increase in four months. The Ministry also forecast that output will increase by 2.7% and 1.7% in September and October, respectively.

The increase in consumer spending contradicted with the Bank of Japan’s (BOJ) survey results of three months previously, which indicated pessimism among households regarding the economy.

There is another reason for yen traders to be bullish.  Washington and Tokyo have commenced with trade negotiations, which is good news as President Donald Trump warned last month that US-Japan relations might be in for a bumpy ride once “I tell them how much they have to pay.” Presently, the White House has suggested 25% tariffs on automobiles, and two-thirds of Japan’s trade surplus with the US is due to automobile exports.

In the meantime, the IMF has stated that Japan certainly needs an overhaul of its economic policies. Even though the economy has returned to a growth path, it is still largely sluggish. Furthermore, the country is facing low inflation and an aging population.

Christine Lagarde, head of the IMF, has suggested Japan take a “fresh look” at Abenomics, a nickname for economic initiatives of Prime Minister Shinzo Abe.

Christine Lagarde said “We believe that it will require a revamping of policies. The basic principles in our view are still valid but need to be broadened, sustained and accelerated.”

The IMF has issued a growth outlook for Japan of 1.1% in 2018 and 0.9% in 2019.

Both the yen and the Swiss franc are regarded as safe haven assets. However, the yen is considerably stronger against the franc due to the interest rate differentials that favor the yen.  While the Bank of Japan has shown an inclination towards monetary tightening in the recent policy meetings, it is the reverse in the case of the Swiss National Bank (SNB), which considers the franc as overvalued.

During the policy meeting held a week before, the SNB maintained its negative interest rate of 0.75%, while stating that it will intervene in the market, if necessary, to weaken the franc further.

The SNB stated: “The franc has appreciated noticeably, against the major currencies as well as against emerging market currencies. The Swiss franc is highly valued, and the situation on the foreign-exchange market is still fragile.”

Therefore, fundamentally, the yen is strengthening against the franc.

Technically, the CHFJPY pair has formed a double top formation as shown in the image below. The next major support for the currency pair exists only at 113.10. As a result, we can expect the currency to decline further.

chf - technical analysis - 10th October 2018

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Janine

Janine

Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be


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