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13 Aug 2013
Beware the Ides of August, USD/JPY downtrend pointing towards 94.00
FXstreet.com (New York) - As we now enter August it is worth noting that the month has certainly been a calamity in years past – indeed, the USD/JPY has fallen in no less than 13 of the last 15 years during this fateful month with 2006 and 2008 being the only exceptions since 1998.
Tracing the genesis of USD/JPY performance
In searching for the cause to this phenomenon, one needn’t look further than the repatriation of August coupon payments from US treasuries by Japanese investors, which has long been attributed to the JPY’s summer gains. In addition to US treasuries – whose 10-year yields remain the highest in the G7 – gilt yields hold the acute potential to become a serious rival for the next carry trade as the BoE Mark Carney’s forward guidance risks being knocked out by inflation.
A close examination of the recent data tranche in Japan yielded preliminary Q2 GDP figures, which witnessed a growth by an annualized +2.6% QoQ, missing an overall consensus +3.6% rise, which obviously draws the collective ire of investors hoping for more robust gains. However, for Japan to post three consecutive quarterly gains in GDP and to exceed growth rates in the US, UK and Germany is clearly ringing endorsement for PM Abe’s policies that recently passed through domestic elections with flying colors. Ultimately though, this does leave a loose end as a matter of speaking, portending a mounting list of the fiscal challenges that must be dealt with.
Despite the tepid optimism, it is important to be mindful of both the initiative and scale of BoJ action coupled with the specter of ratings agencies. Indeed, the last credit rating action was in May 2012, when Fitch downgraded Japan’s rating to A+ from AA – by comparison, ratings from S&P and Moody’s remain one notch above at AA and Aa3 respectively.
USD/JPY decline still has legs
Though August has proven in the past to be a forgetful month for USD/JPY bulls, the long-term upward ascension of the USD/JPY is far from a forgone conclusion. While the pair has waivered recently around the 96.00 region, a retest of 94.00 is certainly in the cards in the medium-term, before the a subsequent recovery would likely transpire, in essence lifting the pair out of the ashes of August.
Tracing the genesis of USD/JPY performance
In searching for the cause to this phenomenon, one needn’t look further than the repatriation of August coupon payments from US treasuries by Japanese investors, which has long been attributed to the JPY’s summer gains. In addition to US treasuries – whose 10-year yields remain the highest in the G7 – gilt yields hold the acute potential to become a serious rival for the next carry trade as the BoE Mark Carney’s forward guidance risks being knocked out by inflation.
A close examination of the recent data tranche in Japan yielded preliminary Q2 GDP figures, which witnessed a growth by an annualized +2.6% QoQ, missing an overall consensus +3.6% rise, which obviously draws the collective ire of investors hoping for more robust gains. However, for Japan to post three consecutive quarterly gains in GDP and to exceed growth rates in the US, UK and Germany is clearly ringing endorsement for PM Abe’s policies that recently passed through domestic elections with flying colors. Ultimately though, this does leave a loose end as a matter of speaking, portending a mounting list of the fiscal challenges that must be dealt with.
Despite the tepid optimism, it is important to be mindful of both the initiative and scale of BoJ action coupled with the specter of ratings agencies. Indeed, the last credit rating action was in May 2012, when Fitch downgraded Japan’s rating to A+ from AA – by comparison, ratings from S&P and Moody’s remain one notch above at AA and Aa3 respectively.
USD/JPY decline still has legs
Though August has proven in the past to be a forgetful month for USD/JPY bulls, the long-term upward ascension of the USD/JPY is far from a forgone conclusion. While the pair has waivered recently around the 96.00 region, a retest of 94.00 is certainly in the cards in the medium-term, before the a subsequent recovery would likely transpire, in essence lifting the pair out of the ashes of August.