Tokyo Stocks Pullback Weigh Heavy on the USD, Boost the Yen

• Stocks lose momentum in Tokyo as the yen strengthens


• USD strength challenged

After being forcefully driven by a torrent of strong US economic data, we watched the USD settle at a 4-month high. The economic data backed by renewed hopes of a rate-hike led the dollar to a new historic high.

The yen on the other hand edged slightly higher against other currencies as investors adopted a bullish stand in light of the currency’s safety following Tokyo stocks’ weakness which was preceded by a six-day winning streak.

“We are seeing yen buying gaining ground due to the stock market weakness,” said Yuzo Sakai, manager of FX business promotion at Tokyo Forex & Ueda Harlow.

Sakai said it’s natural to see selling after the dollar’s quick recovery from around ¥100 just earlier this month. After shortly testing ¥106.53 overnight, its max since June 24, the result of stronger than expected U.S. housing data, the USDJPY currently stands at ¥106.53 compared with ¥106.12 which was seen late on Tuesday in New York.

The USD somewhat finds it difficult to climb further against the yen in Asian session, as Tokyo stocks weakened from the opening bell and ended up closing lower. The Nikkei stock average was down 0.3% by noon.

The EURJPY moved downwards to settle at ¥116.70 from ¥116.97, while the GBPJPY leaped 1.40% from ¥139.14 to ¥138.88. Since the IMF downgraded its forecast for global growth on Tuesday, Sakai stated that investors remain cautious about testing the dollar’s upward momentum.

“Rather than to say the dollar is weak, European currencies as the euro and pound are weaker since yesterday. The dollar and the yen are playing a tug-of-war, causing the dollar to hover around Y106 in a directionless trade,” said Sakai.

The yen continues to hold sway as investors forecast that the yen would only fall slightly, or even grow stronger if the Bank of Japan decides next week to ease monetary policy further. In the meanwhile the Bank of Japan might be in a conundrum over when to take the last few decisions they have.

"Even if the bank implements additional easing, the yen is only going to weaken for the first few minutes," Daisuke Karakama of Mizuho Bank said of the two-day BOJ policy meeting starting July 28. Karakama stressed that the currency will most likely end up stronger regardless of the bank's decision, since most investors already expect more monetary stimulus, and if this fails to happen the market would reel from disappointment.

Analysts remain sceptical with the idea of any major fall in the yen. A quick survey conducted this month also showed that the majority of forex experts and traders expect the BOJ to enlarge its stimulus at their next meeting. Some of them want the BOJ to reach the extent of implementing the “helicopter money” policy. This leaves the BOJ under immense pressure to surprise the market.