For the third consecutive trading day, the foreign exchange market has been obsessed with the strength of the Japanese Yen. Rising risk aversion continued to be blamed for the move, but with the Dow up over 90 points today, it is difficult to believe that investors are really all that risk averse. Instead, the rally is more likely driven by the turnaround in the Japanese economy.
Having struggled to grow for the past few months, we are finally beginning to see Japan reap the benefits of Yen weakness. Last night, the country reported the first positive reading in annualized retail sales in 8 months. This follows yesterday?s announcement that the Corporate Service Price Index (CSPI) hit a 9 year high in the month of May. The combination of rising consumer spending and growing inflationary pressures is just what the Bank of Japan needs to see before raising interest rates again. Industrial production which is due for release this evening is also expected to swing into positive territory in the month of May. At this point, there is also a decent chance that we will see stronger consumer prices on Thursday. If everything prints positive, then a 25bp rate hike on July 12 or August 23rd becomes a real possibility. With the Dow rebounding and the FOMC announcement tomorrow afternoon, further carry trade unwinding may be limited.