The Japanese yen continues to gain ground this week. In North American trade, USD/JPY is trading at 112.54, down 0.26% on the day. On the release front, U.S. housing numbers improved in November. Building Permits jumped to 1.33 million, up from 1.27 million in October. Housing starts climbed 1.26 million, compared to 1.23 million a month earlier. Both readings beat their estimates. Later in the day, Japan’s trade deficit is expected to continue to widen, with a forecast of JPY -0.31 trillion. Investors will be keeping a close look at the Federal Reserve is expected to raise the benchmark rate by a quarter-point.
The markets are predicting that the Federal Reserve will raise interest rates on Wednesday, but this could be the last rate hike until well into 2019. The Fed has already raised rates three times this year, a testament to the strong U.S. economy. Just one week ago. the CME Group had set the odds of rate hike at 80%, but this has fallen to 69%. A key factor in the drop is the latest equity sell-off. The week started poorly, as the S&P fell on Monday to its lowest level since October 2017. Rate hikes are unusual when stock markets are swooning, so traders should be prepared for the Fed to send a dovish message to the markets, along with a quarter-point rate hike. This could send the dollar downwards on Wednesday.
The BoJ will also set interest rates on Wednesday, and investors will be closely attuned to the tone of the rate statement, which is expected to be dovish, as the global trade war continues to take a toll on the Japanese economy. Japanese Final GDP in Q3 declined 0.6%, the second decline in three quarters. The well-respected Japanese Tankan Manufacturing index remained steady at 19 points in the third quarter. However, recent manufacturing indicators have pointed downwards, pointing to slower activity in the manufacturing sector. This is attributable to slower global economic conditions, which has taken a bite out of Japanese exports and manufacturing. With Japanese exports to the U.S. and China facing higher tariffs, it’s not surprising that recent manufacturing reports have been soft.
