USD/JPY has posted gains in the Wednesday session. In North American trade, the pair is trading at 110.63, up 0.45% on the day. The pair has posted two straight winning days, and is up 2.0% this week. On the release front, Japanese data beat expectations, but this was not enough to stem the dollar’s rally. The BSI Manufacturing Index jumped 9.4 points in the second quarter, its strongest reading in two years. Japanese PPI improved to 2.9%, just shy of the estimate of 3.0%. In the US, inflation numbers improved in August, but fell short of the estimates. PPI improved to 0.2%, shy of the estimate of 0.3%. As well, Core CPI gained 0.1%, short of the forecast of 0.2%. On Thursday, we’ll get a look at US CPI and unemployment claims.

The yen continues to lose ground, as investors have quickly put the Korean hot spot behind them, at least for the time being. In recent weeks, risk appetite has waned, as North Korea as inflamed tensions by firing missiles over Japan and testing nuclear devices, much to the consternation of the US, Japan and South Korea. As a safe-haven asset, we could see investors quickly return to the reliable yen if the war of words between US President Trump and North Korean President Kim Jong-un escalates. If the uneasy calm between North Korea and South Korea continues, the dollar could punch above the 111 level, which was last reached in August.

Despite a strong economy, US inflation levels remain stubbornly weak, well below the Federal Reserve’s inflation target of 2.0%. This was underscored on Wednesday, as PPI and Core PPI missed their estimates in August, although both releases did rebound compared to the July readings. The US labor market remains very strong, but wage pressure has been limited, despite the fact that many businesses cannot fill job openings. Weak inflation has hampered the Fed’s plans to raise interest rates a third time this year, and the odds of a December rate hike are currently pegged at 41%, as the markets are increasingly doubtful that the Fed will make a move before next year. If the August CPI numbers beat expectations, the likelihood of a December hike should move closer to 50%.


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