Yesterday, Japan announced another trade deficit and low exports. The country recorded 822.2 billion Yen trade deficit in June, higher than the forecasted -642.9 deficit. Consequently, the data granted reprieve to the USDJPY from its bearish course that has been ongoing since 1st week of July.

Yesterday, Japan announced another trade deficit and low exports. The country recorded 822.2 billion Yen trade deficit in June, higher than the forecasted -642.9 billion Yen deficit. Consequently, the data granted reprieve to the USDJPY from its bearish course that has been ongoing since 1st week of July.

JapanJapan Trade Balance 2012-2013

 

Weak Fundamental

The disappointing June trade balance marks the second year of deficit suffered by Japan. The recent data shows that imports (yoy) is actually meets expectations by rising 8.4%. However, exports remain sluggish; it was expected to rise as much as 1%, but it actually dropped -2%.

Exports is one of the main drive behind Japan economy; but along with the country's inflation, it has remained stubbornly low. Many has offered advices on how to deal with it, but not even the legendary Abenomics has managed to recover its lost grounds. Except for further (and bigger) stimulus and continue with the rest of Abenomics structural reform plan, Japan seemed clueless. And so, that is the way market sees the Yen fundamentals: weak.

Fortunately, in the aftermath of April tax hike, Japan inflation rate has improved from 1.6% in March to 3.4% and 3.7% in April and May respectively. Also, core inflation rate rose from 1.3% to 3.2% and 3.4% during the same period. Will the improvement sustained in June data? Many have doubted that the improvement that was driven by tax hike will be sustainable. Forecast for June inflation data that will be published later today puts June inflation at 3.5% and core inflation at 3.2%.

 

Safe Haven Demand

Although Yen fundamental basis is relatively weak, demands for the Yen has been high due to the many conflicts across the world. The fall of Malaysian Airlines MH17 put risk factor back in the west and fanned tensions between Russia, Europe, and the US. Following the tragedy, both USDJPY and EURJPY are traded around month low level. Investors were selling higher-risk currencies for safe haven currencies. A screenshot of the two pairs on H4 timeframe show that USDJPY and EURJPY movements mirror each other. Both fell after MH17 tragedy (note price movements during 18-21 July).

USDJPYUSDJPY (Green Candles) and EURJPY (Magenta) in H4 Timeframe at 24 July 2014


But the worst, hopefully, has passed. World leaders rhetoric about Ukraine and other conflicts has reassured the market that nothing like world-scale clash will happen. Therefore, price movements from July 22th signify that market needs for safe haven has weaken and risk aversion sentiment has diminished. But as long as peaceful resolution is not yet reached in Middle East and Ukraine, the USDJPY will likely maintain its current range inside 101.0-103.0 area till first week of August.

The USDJPY current outlook is limited bullish. The USD has strengthened in the last few days, and it might stop USDJPY downward race. However, any indication of economy improvement from Japan and escalated conflicts elsewhere increases the likeliness of USDJPY to stay longer in the downside.