Yen Gains After Abe Setback

4 July, 2017

This week, the dollar is starting off on a strong note as US interest rates continue their increase from Friday. For example, 10-year yields were around 2.33%, up by 0.03% from Friday afternoon.

Even though EU CPI beat all the predictions, still EUR/USD failed to make another 2017 high on Friday and USD/JPY rose on Friday as US interest rates moved up (the yen weakened).

This week started with several significant indicators in Asia. Tankan, the Bank of Japan’s short-term survey of economic conditions exceeded all expectations on most of the major indicators. In addition, PM Abe’s Liberal Democratic Party (LDP) had a tragic defeat during the election for Tokyo’s assembly. They lost more than half of their seats and ended up with only 24 in the 127- seat assembly. Weirdly enough, this caused the yen to strengthen momentarily on risk aversion.

The yen quickly resumed its trend downwards with USD/JPY resuming its uptrend, making the yen as the biggest currency loser among other currencies today.

Oil prices rose after the weekly Baker Hughes data showed that the number of oil rigs in the U.S decreased in the last week. This happened for the first time after 24 weeks.

Trading activity is expected to be limited in the afternoon as the US Independence Day Holiday is on Tuesday and most people are going to take Monday off as well to make it a long weekend.

The European day will start with the final PMIs from Germany, France and the EU. Even though the figures are sometimes revised, investors don’t usually react to the revisions much.

Therefore, the first major indicator on the European schedule for today is the UK manufacturing PMI which is expected to have a slight decline but this isn’t expected to cause any problems as it is going to decline from a relatively high level.

In the US today, the final version of the Markit manufacturing PMI is expected to be released today. This will be released 15 minutes before the closely watched Institute of Supply Management (ISM) index (the original PMI), and therefore, its implications on the market are quickly eradicated.

The ISM index is predicted to have a slight increase as the five regional Fed surveys plus the Chicago PMI were in general higher and oil prices are weighing on sentiment. If the higher ISM index prediction becomes a reality, this could convince investors to join in and push the dollar even higher.

US construction spending is expected to rebound slightly on a month-on-month basis but still remain relatively weak. As the graph below demonstrates, even after the sharp decline in April, the May figure is expected to go below the average level of growth for the last six months.

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