USD/JPY is almost unchanged in the Monday session. In North American trade, the pair is trading at 110.80, up 0.11% on the day. On the release front, it’s a quiet start to the week, with no US releases on the calendar. Later in the day, Japan releases Current Account, with the surplus expected to climb to JPY 1.51 trillion. On Tuesday, the US publishes releases JOLTS Jobs Openings, which is expected to edge lower to 5.66 million.
The US dollar pushed the yen lower on Friday, courtesy of a solid nonfarm payrolls report. The indicator came in at 209 thousand, easily beating the estimate of 182 thousand. The unemployment rate edged lower to 4.3%, but the positive news was dampened somewhat by wage growth, which remained unchanged at 0.3%. This underscores weak inflation levels, which has left investors skeptical as to whether the Federal Reserve will raise rates one final time in 2017.
Last week’s strong US payrolls report boosted the US dollar and raised the odds of a December rate hike, which are currently at 47%, up from 43% one week ago. With the Federal Reserve unlikely to raise rates before December, investor attention has shifted to the Fed’s balance sheet, which stands at $4.2 trillion. Fed policymakers have broadly hinted at reducing purchases of bonds and securities starting in September, but San Francisco Fed President John Williams was more forthcoming about the Fed’s plans, likely aimed at giving notice to the markets. In a speech on Wednesday, Williams said that the economy had "fully recovered" from the 2008 financial crisis and called on the Fed to start trimming the balance sheet "this fall". Williams added that the process would be gradual and would take four years to reduce the balance sheet to a "reasonable size". Other FOMC members have also come out in favor of the Fed starting to wind up its portfolio this fall.
Japan’s economy has shown improvement, but the Japanese consumer remains pessimistic about economic conditions. Consumer Confidence moved higher in July, with a reading of 43.8 points. This marked a 4-month high. The lack of confidence in the economy has resulted in soft borrowing and spending levels. At the same time, manufacturing and housing indicators looked sharp earlier this week. Preliminary Industrial Production rebounded with a strong gain of 1.6%, after a decline of 3.3% a month earlier. As well, Housing Starts gained 1.7%, compared to a reading of -0.3% in May. These numbers underscore a stronger Japanese economy, buoyed by stronger demand for Japanese exports. However, weak inflation levels remain a serious concern. The BoJ’s ultra-loose monetary policy has failed to coax inflation upward. At its recent policy meeting, the BoJ again extended its time-frame for reaching its inflation target of 2%. The bank is reluctant to scale back its asset-purchase program, which means that it will likely lag behind other central banks, such as the ECB, in reducing its stimulus program.
