By John Jagerson, 30 Aug 2007
Core CPI was just released in Japan with another decline equal to last month. This is bad news for officials in Japan as the fight against deflation continues. The decline of -.01% this month was disappointing and will make it very difficult for the BoJ to raise rates in the near term. This is clearly very bad news to the hawks in Japan who want to begin normalizing their monetary policy.
The immediate reaction to this is a mild decline of the JPY against the USD. I can see the rationale behind that. If a rate hike is less likely then the currency is still cheap and likely to be shorted. However, I would make the argument that the probability, high or low, of a rate hike is irrelevant to the near term future of the major JPY crosses. Specifically, I think this could turn into a trap for USD/JPY bulls or over zealous carry-traders.
The real driver of the JPY in the short term is going to be risk. If the credit problems in the U.S. continue to expand we will see investors continue to cover their short JPY positions and that is likely to drive the USD/JPY down. Don't get trapped until we see more evidence that risks, not rates, are declining.
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Analysis by Profiting With Forex (PFX)
Analysis by Profiting With Forex (PFX)
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