USDJPY: Abe Fights The Taper Traitor
When you talk about the prospect of unexpected announcements from the Federal Reserve you usually expect USDJPY to be the stand-out performer. After Ben Bernanke, Fed chairman, failed to taper on Wednesday the dollar tanked, Treasury yields nose-dived and risky assets surged. Since USDJPY has a close relationship with Treasury yields the logical assumption would be that USDJPY would fall alongside yields, however the move was far more muted, and the yen was actually the worst performer versus the USD in the G10.
Yen strength was kept in check by the news that Prime Minister Abe and the core members of his cabinet have agreed, in principle, to increase the value added tax to 8% from 5% in April next year, which would open the door to a doubling of the tax to 10% by April 2015. A formal announcement is expected on April 1st after the release of the Tenkan survey for Q3.
Many people have said that an increase in the sales tax is necessary to keep Japan's enormous public debt, which stood at 214% of GDP at the end of 2012, in check, however others are more cautious. The last time the sales tax was increased in 1997 it was followed by a deep recession.
Growth fears seem to be the key driver of yen weakness on the back of this news. The Bank of Japan has hinted that it won't add more monetary stimulus until the government embarks on a programme of fiscal consolidation, thus, there could be further stimulus (the BOJ already provides the equivalent of $70 bn in liquidity per month) down the road.
Bolstering that view, BOJ board member Kiuchi said today that he sees the risks to Japan's growth outlook tipped to the downside due to fears about the global growth outlook. Japan's trade balance was also in deficit for the 14th straight month in a row in August.
So what does this mean for USDJPY?
Domestic factors in Japan are acting as a cushion of support to USDJPY, which fell to a low of 97.76 post the FOMC decision. Japan's domestic fundamentals have helped the dollar to rebound, and it is currently testing a cluster of daily moving averages at 98.80-99.05. Above here opens the way to 99.30 - the high from earlier this week, and then 100.00, a key psychological level, ahead of 100.60 - the high from 11th September.
On the downside, key support is now 97.77 - the post FOMC low.
Takeaway: After the FOMC decision not to taper, the USD held up surprisingly well against the yen. The muted reaction in USDJPY was partly due to news about the Japanese consumption tax hike. A formal announcement is due October 1st from the Japanese government. Until then we expect USDJPY to trade in a range between 97.70 - 100.50 - the recent high.