Eyes on Japanese data and politics, but focus remains on the Fed

USDJPY remained range-bound around 124 last week after rebounding sharply from 120 on receding Greek concerns. Recent price action has been consistent with the view that USDJPY should oscillate around 123 with risks on both sides. Upside risks include a bringing forward of Fed hike expectations and downside risks include a deterioration of risk sentiment. Having said that, Japan factors have become less supportive of the yen recently, including slowing economic activity, decelerating core CPI, and a sharp drop in approval ratings of the Abe administration.

Economic data have disappointed lately, suggesting that Q2 GDP will contract and y/y core CPI will likely to turn negative again over the summer/fall. In this light, the June Household survey (Friday), June Industrial Production (Thursday), and June Core CPI (Friday) will demand some attention this week. 

"We expect June real household spending to increase +2.8% y/y (consensus: +1.9%), the second consecutive month of positive y/y growth. We forecast June Industrial Production to increase +0.1% m/m (consensus: +0.3%), but translates to a 1.8% contraction in Q2 as a whole. On inflation, we look for June core CPI to stay at +0.1% y/y (consensus: 0.0%) from +0.1% in May," says Barclays.

Furthermore, major polls show that approval rating for Abe administration plummeted to sub-40%, the lowest rating since Abe's inception in December 2012, likely over the controversial security bills. A combination of worsening economic activity, decelerating core inflation on the back of falling oil prices, and a deteriorating cabinet approval rating suggest that there may be less incentive for political jawboning against yen weakness than there was a month ago. All in all, Japanese data and political development will continue to demand close monitoring while Fed hike expectations likely remain the main driver of USDJPY in the weeks ahead especially given important US events, including FOMC, GDP, core PCE deflator, and nonfarm payrolls.