Rising risk aversion is supporting the JPY but the currency may also be finding some support from the misplaced view that the Bank of Japan may not need to be any more aggressive in its policy stance to reach its 2% inflation target, with Japan’s finance minister noting that deflationary conditions have almost ended. Such talk looks premature.
Japan still has a long way to go to reach and sustain inflation at its target. The risk is that without any structural reforms (jobs market, manufacturing sector, immigration) deflation and slower growth could quite easily take hold again. In any case, the Bank of Japan is likely to embark on more aggressive policy in the months ahead in order to achieve the 2% target. In the near term USD/JPY looks supported around 102.50.
The EUR found some additional support from a strengthening in manufacturing confidence in the region, which highlighted that economic recovery continues to take shape. Fitch’s affirmation of Germany’s credit ratings at AAA has also helped sentiment towards the currency.
In the near term much of the same tone is likely although the relatively stronger US economic performance and tapering expectations will mean the USD will not fall too far. EUR/USD will face technical resistance around its 2014 high at 1.3776.