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Dovish Fed Comments Lead to USD JPY Exchange Rate Slump

August 8, 2017 - Written by Toni Johnson

Remarks of two Fed policymakers have weakened the US Dollar today, leading to a drop to 110.4200 against the Japanese Yen.

USD JPY Decline Triggered by Downplayed Interest Rate Hike Odds

On a relatively quiet week for US economic announcements, the US Dollar has slipped against the Japanese Yen by -0.3%.

This weakness has come from a negative trader reaction to earlier statements from Federal Reserve officials Neel Kashkari and James Bullard.

Kashkari is the only voting member in 2017, but Bullard’s words still hold weight among Dollar traders. Both men are considered to be ‘dovish’ on monetary policy, which means they are more likely to back slower interest rate hikes instead of a faster pace.

In this vein, Kashkari delivered on the cautious front by warning that lower immigration could lead to slowing economic growth. In his own words, the policymaker simply summarised by asking;

‘Do we want economic growth, or not? That's what it comes down to’.

Immigration has been a hot topic in the US ever since Donald Trump took office, given the 45th President’s attempts to block travel to the US from a number of countries.

The other Fed influence today, James Bullard, has given an even more explicitly cautious statement.

Focusing on future monetary policy changes, Bullard stated that;

‘The current level of the policy rate is likely to remain appropriate over the near term’.

In essence, this means that US interest rates may not rise in the near future, potentially not until 2018 at the earliest.

Bullard has additionally warned that low US inflation may also be a long-term problem, as persistently low costs on goods and services may not be a quick fix.

At the start of 2017, it had been predicted that there could be three or even four US interest rate hikes in the year. After the two hikes seen in March and June, however, a third rate increase in December remains a 50-50 possibility.

Japanese Yen Advances on Rising Current Account

The Yen has risen against the US Dollar today thanks to a rising current account surplus in the first half of the year.

Between January and June, the national current account hit a 10-year high. A measure of the nation’s savings compared to its spending, the current account is widely used to gauge the level of international trades conducted by a nation.

Commenting on the supportive figures was Barclays Securities Japan economist Yuichiro Nagai;

’The pace of growth in exports may slow going forward after a strong run. Still, the primary income surplus is expected to stay at high levels [to support the current account surplus]’.

In other Japanese news, it has emerged that US officials Rex Tillerson and Jim Mattis will be meeting with Japanese representatives to discuss the growing threat of a nuclear North Korea.

USD JPY Economic Forecast: US Confidence Printing and Oil Stock Stats Coming Up

Before the week’s main US news comes on Friday, Tuesday will bring a confidence measure and Wednesday will see US crude oil stocks announced.

In the former case, the IBD/TIPP economic optimism index is forecast to show no change in August, which could have a neutral effect on the US Dollar.

More notably, a reduction in crude oil stocks could trigger a US Dollar rally, as lower supplies of oil usually result in higher prices for remaining stocks.

Ending Wednesday’s US news will be another Fed speech, this time from Charles Evans. Evans is also considered a policy dove, so the US Dollar may slip on cautious remarks like those from Kashkari and Bullard.

For the rest of the week, Japanese factory data will have the greatest impact on the Yen.

Wednesday will bring a measure of machine tool orders, while Thursday will see machinery orders for June announced.

In the latter case, a monthly recovery from -3.6% to 3.7% is expected in June, which may boost Yen demand.
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