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Yen Unchanged, Markets Quiet Ahead of FOMC and ECB Rate Decision

Gary Kerdus

THE TAKEWAY: Japan’s industrial production slowed at decreasing rate > Markets likely to find direction later in the week: FOMC and ECB rate decision > Yen relatively unchanged

There was little movement in the Japanese Yen versus the Australian Dollar as industrial production for the Japanese economy contracted by 2 percent in June year-over-year. The month-over-month figure for June also declined to -0.1 percent from -3.4 percent which suggests the production sector may have slowed, but at a lesser rate.

Japan’s economy is largely driven by export demand for production goods. Exports to Europe and Asia decreased by 18.2 percent and 4.25 percent in the second quarter of the year while the flow of goods to the U.S. increased by 10 percent over the same time. The European slowdown has likely been the primary contributor to the slowing of Japanese production as indicated by the large drop-off in export demand.

The demand for Yen is mostly driven by risk aversion as traders seek safety in highly liquid assets, such as the Yen, during times of increased market volatility. Looking ahead, on August 1 the FOMC, and on August 2 the ECB, will both announce their decision to either change or keep benchmark lending rate the same. Both announcements carry the potential to create a market environment that either encourages risk-taking or drives the majority of investments to seek protection in safe-haven assets.

AUD/JPY, 5 Minute Chart

Yen_Unchanged_Markets_Quiet_Ahead_of_FOMC_and_ECB_Rate_Decision_body_Picture_1.png, Yen Unchanged, Markets Quiet Ahead of FOMC and ECB Rate Decision