Sep 13, 2013

FOREX WEEKLY
Treasury Unit

Chief Economist Etsuko Yamashita

Tel: +1-212-224-4561

etsuko_yamashita@smbcgroup.com
Global View

Growth expectation is important

Tokyo was chosen as the 2020 Olympic host city last weekend and Japans GDP for April to June
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announced on the 9 was a huge upward revision. With such consecutive positive news, it is likely to
brighten up the mood of the Japanese.
I saw images of joy on the faces of the young Japanese when Tokyo was announced as the host city for
the Olympics and I felt as if I saw a reverse side of Japans long term economic stagnation and outlook
uncertainty. Property prices grew during the property bubble at the end of the 1980s based on the growing
mythUS property bubble around 2005 was same and was a cause of the financial crisis. However, with
the burst of the property bubble, Japan went into deflation era and experienced an extremely long term
declining situation with difficulties in seeing a rise in prices, wages and a weak economy (US did not
experience to this extent). It is not good that the growing myth gives rise to the bubble but if the Japanese
are influenced with a deflated mind as a result of long term economic deflation, this is similarly not
something positive. Reports of the Olympic host city decision may purely be delightful news to the young
Japanese but it may be hope for the first time in their life and a passionate era is likely to have arrived.
The current BOJ monetary measures are being explained as measures influencing expectations. If
expectations which is a difficult variable of the numerical threshold moves,

price function is likely to be

shifted upwards or see a upward refraction, and economic function apart from prices will also see a huge
flexibility coefficient above experimental assumptions. In other words, prices will rise beyond the figure
calculated during the deflation era and the same can be said about economic recovery. People who were
skeptical towards this logic and argument are recognizing the major role of expectations with clear actual
improvements seen in Japans economic data in the past half year.
Apart from the young, the middle age group who were discouraged by the bubble burst is also expecting
an obvious improvement in Japans economic stance in 2020 compared to the present. It probably holds
an immeasurable psychological effect while anticipating economic effect (construction investment and
related goods etc) directly linked to the hosting of the Olympics.

FOREX WEEKLY

US View

Sep 13, 2013

Next weeks FOMC is finally nearing

Russia is currently taking complete lead in Syrias situation with US and President Obama straying off
the course. US Secretary of State John Kerry and Russian foreign minister carried out talks at Geneva but
with Syrias pledge to turn over its chemical weapons, US military intervention towards Syria faced
difficulties. The survey within the US showed a majority of public opinions opposing to Syrias attack and
there were some reports criticizing President Obamas political skills. This is giving rise to the general
feeling of President Obamas political stagnation other than Syrias issue.
The main scenario in the markets is the evasion of an attack and it seems that focus is gradually starting
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to be on the FOMC scheduled on 17-18 . The US employment data announced on the 6 saw a huge
downward revision of last months figure to 100K range and the observations of QE tapering at next weeks
FOMC may have slightly retracted. However, the decision of QE tapering still stands at a majority. The US
10-year bond yield this week fluctuated between 2.853.00 with a lack of direction.
There are many points to note at the FOMC. With the start of QE tapering, there are many points to take
note such as the FOMC statement, economic forecast, Chairman Bernankes press conference,
breakdown of reduction amount in QE US bonds, MBS, the reduction in the amount purchased
respectively, forward guidance pertaining to interest rates hike and monetary interest rates forecast etc.
If QE tapering is postponed, it is likely that bond yields will fall, stock markets will rise and USD will fall
following the fall in interest rates. However, in the case of QE tapering, bond yields are likely to rise, stock
markets will fall and USD will rise. Since many points mentioned above will be brought up at the FOMC, if
there are no changes to forward guidance concerning interest rates hike, unemployment rate will be
revised downward in the economic forecast and monetary interest rates for 2014 and 2015 will be shifted
upwards, the US 10-year bond yield will rise beyond 3%. Also, interest rates will plunge thereafter if dovish
remarks were made by Chairman Bernanke at his press conference. Markets response is likely to differ
depending on the different combinations. The press conference is held 30 minutes after the
announcement of the FOMC statement and the economic forecast and thus, there is risk of major
fluctuations in the markets during this time interval. There is a need to scrutinize all information of the
FOMC with extra caution on the day.
The overall unemployment rate outlook is likely to be loweredunemployment rate is already falling to
7.3%such as the 2013 year end unemployment rate outlook at the economic forecast this time. If the
economic growth rate is in the 3% range predicted and inflation rate rises toward 2%, it is theoretically
possible that interest rates will reach neutral level of 4% or rise beyond that. What will be the level and the
pace of interest rates hike in 2015 and 2016? What will be the conformity of economic forecast figures and
monetary policy as well as forward guidance based on the economic data? Other than next weeks FOMC,
US monetary policy will enter an interesting phase over the next few years.
Besides FOMC next week, several economic data are scheduled to be announced such as industrial
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output on the 16 , housing starts on the 18 . The distance to the scale of QE tapering amount and interest

FOREX WEEKLY

Sep 13, 2013

rates hike subsequently is dependant on economic data. Thus, markets will not stabilize even after QE
tapering and are likely to see fluctuations while keeping watch on the economic data. The expected range
for US 10-year bond yield next week is 2.853.05

FX Outlook

Focus will be on FOMC

The solution of Syrias situation by diplomatic means led by Russia is being explored and the possibility
of a US military intervention is equivalent to zero due to Syrias pledge of turning over their chemical
weapons. Yen depreciated and USD/JPY rebounded temporarily to 100 yen/$ after the loss in risk
appetites eased. Also, EUR/JPY rose to the low of 133 yen/.
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Japans April-June revised GDP announced on the 9

was upward revised to +3.8. Although the

upward revision was expected, this figure was extremely strong. Tokyo was being chosen as the 2020
Olympic host city during the weekend and the Nikkei Average in the first half of this week rose greatly by
about 350 yen compared to last weekend. Consumption tax increase is expected to be announced at the
start of October simultaneously as the economy boosting package and there are no negative factors
strongly captured from news from Japan. Will USD/JPY rise beyond 100 yen? Factors are favorable on the
Japan side. China economic data sustained improvement and loss in risk appetites will start to ease from
here. JPY will return easily to its depreciating trend.
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On the other hand, the FOMC scheduled on the 17-18 will be an important factor on USD side. There
will be strong surprises if QE tapering is postponed with US interest rates to fall temporarily and a possible
fall in USD as a result. However, with QE tapering, there will be anticipations of rise in interest rates and
USD will rise. Interest rates will fluctuate around FOMC and USD is foreseen to fluctuate accordingly. USD
is likely to react accordingly to the strong or weak outcome of the economic data after FOMC.
If Syrias situation captures a fall in US prestige, USD is likely to weaken. President Obamas actual
withdrawal of military action is seen as a factor for USD selling. However, this situation is gradually within
expectations and thus, USD selling will probably be on a small scale.
In the Euro zone, voting on the removal of former Prime Minister Berlusconi from his Senate seat is
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expected to be held on the 18 and Italy 10-year bond yield eventually rose above Spain. EUR/USD rose
above 1.33/$ this week and confusion in Italys political situation did not see major influence on EUR.
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However, if the passage is approved on the 18 and result in a breakup of the ruling coalition, EUR is likely
to be sold. On the other hand, the aversion of Syrias attack is foreseen and the possibility of a joint military
action between US and France has almost ceased. The risk of EUR selling due to Syrias situation also
retracted.

FOREX WEEKLY

Sep 13, 2013

Next Weeks Forecast Points

USD/JPY

Fluctuate

EUR/JPY

Leveling out

Last Weeks Range

Focus will be on movements of US interest rates around FOMC

Loss in risk appetites eased due to Syrias situation
Will Italys political situation be a factor for EUR selling?

TKY 9 AM

This Weeks Forecast

3M Forecast Range

Range
USD/JPY

98.52-100.62

99.57

99.00-101.00

90.00-105.00

EUR/USD

1.3105-1.3325

1.3298

1.3200-1.3350

1.2500-1.3500

EUR/JPY

129.89-133.37

132.41

131.00-133.50

120.00-135.00

This weeks range is last Fri TKY 9 AMtodays TKY 9 AM, forecast range is todays TKY 9 AM next Fri TKY 9 AM
USD/
USD/JPY

EUR/
EUR/USD

(JPY)

EUR/
EUR/JPY

(USD)

YY/MM

(JPY)

YY/MM

YY/MM

SourceReuters

From Dealers
DealersNext week direction
direction of USD/JPY market
marketBullish/Bearish
Bullish/Bearish
Month

July

Forecast

Actual

Neural

Bearish

Week

29

Aug

19

Neutral

Bullish

Neutral

26

Bullish

Sep

16

Note We carried out hearing from 8 SMBC FX dealers (market, customer) for next weeks market predictions. This week
from 9am TKY time, USD bullish (USD appreciated more than 1 yen at closing) , neutral (USD fluctuated within 1 yen at closing)
and USD bearishUSD depreciated more than 1 yen at closing. Amongst the 3 options, the outcome are as abovebullish
USD USD bearish. () means weak yen/strong USD, () means strong yen/weak USD.
This report is created today NY time based on information up to noon.
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FOREX WEEKLY

Sep 13, 2013

Movements of various markets

BondsJGB10 Year bond yield

BondUS bonds10 year bond yield

StockNikkei Average

StockUS Dow Jones

StockShanghai Composite Index

StockDE DAX

Crude OilWTI

GoldNY

USD/BARREL

USD/TROY OUNCE