Japanese Yen underperforms on surprising current account deficit

The Japanese Yen (JPY) is down against its major currency peers on Monday, trading 0.6% lower at around 158.80 against the US Dollar (USD) at the time of writing during the European trading session. The Japanese currency faces selling pressure as the nation's current account surprisingly turns to a deficit in June.

Earlier in the day, Japan’s Ministry of Finance (MoF) reported that the net flow from goods, services, and interest payments into and out of Japan was in deficit at JPY 92.3 billion, while the data was expected to remain in surplus at JPY 1,512 billion. In May, the current account surplus was at JPY 3,968.3 billion.

The MoF reported that higher crude Oil prices and significant dividend payouts to foreign investors led to a significant jump in total outflows.

On the monetary policy front, the Summary of Opinions (SoP) of the July policy meeting released earlier in the day showed that the majority of officials continue to support a tightening bias. One member also favored to quicken the tightening process than markets currently expect amid rising upside risks to prices.

On the US Dollar front, investors await the United States (US) Consumer Price Index (CPI) data for July, which will be released on Wednesday, to get fresh cues regarding the Federal Reserve’s (Fed) monetary policy meeting.

After the release of the weak US NFP report for June on Friday, financial markets have trimmed hawkish Fed interest rate expectations.

Fed repricing gathers pace as weak employment data underpins US Dollar bearishness

Strategists at ING highlight that the first of their five tests for a more dovish Fed stance “arrived on Friday and came through clearly dovish and dollar-negative.” They point out that, as ING economist James Knightley notes, “the -20k payroll print was not the only concern,” with “more than 100k of downward revisions” leaving “average payroll growth at just 20k over the past three months, with health and social care still doing most of the heavy lifting.”

Against this backdrop, ING says “our dovish Fed call is strengthening, and so is our bearish bias on the dollar.” The bank underscores that, even after Friday’s move, “11bp are still priced in for September, 28bp for December and 40bp for April,” arguing that “there remains ample room for dovish repricing to harm the dollar if we are right about the Fed.”