Consumer Confidence (JUN) (05:00 GMT; 01:00 EST)
Expected: n/a
Previous: 47.4

Consumer Confidence H’Holds (JUN) (05:00 GMT; 01:00 EST)
Expected: 47.0
Previous: 47.3

How Will The Markets React?

Fundamental data out of Japan isn’t likely to be impressive, as consumer confidence for the month of June is anticipated to ease back further below the 50 level – signaling that the majority of people surveyed remain pessimistic about the economy. In fact, both the overall and household consumer confidence readings have held in the 40’s since April of last year, as tepid wage growth leaves the Japanese less optimistic about their prospects for income growth, willingness to buy, and overall livelihood. Ironically, the one factor that has remained relatively buoyant is the employment component, as jobs remain plentiful and the labor market continues to tighten. Nevertheless, until wage growth accelerates from its dismal -0.7 percent pace in April (year-over-year), workers have little reason to feel more sanguine or to spend, as disposable income stagnates. While this economic data is certainly pertinent to Japanese bond, equity, and forex markets, trading of Japanese Government Bonds and the Nikkei 225 Index in the upcoming session may rely more upon price action in the US market on Tuesday. The massive shift to risk aversion has already come into play in forex markets, but there is the potential for this market sentiment to roll over into the Asian session, creating upside risk for JGB’s and downside risk for the Nikkei 225.

Bonds – 10-Year Japanese Government Bond Futures

The intraday chart for 10-year JGB futures show heavy resistance from a descending trendline and the recent highs at 131.37. Such a scenario would normally warrant bearish implications for JGB’s, but the combination of market risk aversion along with tepid Japanese economic data could send bonds rocketing higher during the next trading session. In fact, bonds in the US and throughout Europe rallied on Tuesday after the S&P said that they may cut ratings on $12 billion worth of subprime mortgage-backed bonds.

FX – USD/JPY

The Japanese yen made substantial gains Tuesday as a bout of risk aversion permeated throughout the forex, bond, and equity markets. News that the S&P may cut ratings on $12 billion worth of subprime mortgage-backed bonds sent traders flocking to safer havens, as USDJPY and NZDJPY plunged over 100 points towards 122.00 and 95.00, respectively. With interest rates in Japan still at an ultra-low 0.50 percent, today’s price action signals that a rate hike by the Bank of Japan may not necessarily be needed in order to initiate a massive unwinding of carry trades and confirming the dangers associated with maintaining highly leveraged trades. Such one way bets will also encounter event risk this week as the BOJ is scheduled to meet on Thursday. The central bank is widely expected to leave rates steady this month, especially as the economy remains in deflation and with the LDP elections occurring at the end of the month. So does this mean BOJ Governor Fukui will move to normalize rates in August? There is certainly speculation that he and his fellow policy makers will discuss such a move, but they will face substantial resistance from the government, as officials such as Kozo Yamamoto and Shigeyuki Goto have recently spoken out against such measures.

The more immediate concern for USDJPY traders lies in the release of Japanese consumer confidence. The figure is anticipated to come in even weaker – not entirely surprising given the dismal status of wage growth. While the indicator is not a huge market mover, a particularly soft reading could help USDJPY return above its ascending trendline. On the other hand, a solid break through 121.70 could signal that even more substantial declines loom on the horizon.

Equities – Nikkei 225 Index

Japanese stocks declined, led by exporters after the Japanese yen strengthened against the US dollar and Euro, with the Nikkei 225 closing the day down 0.1 percent to 18,252.67. Canon, the world's biggest digital camera maker, dropped 71 percent to 7,120 while Toyota Motor Corp., the world's largest automaker by market value, declined 0.5 percent to 7,790. Meanwhile, property stocks took a hit as well on concerns that higher borrowing costs will erode profits. Mitsubishi Estate Co., the nation's second-largest property developer by sales, slid 1.5 percent to 3,290 as Sumitomo Realty & Development Co., the third largest, fell 1 percent to 3,950.

A daily candle chart shows the Nikkei 225 nearing the apex of an ascending triangle – a particularly gloomy indication for the index as this tends to lead to breakouts. The 18,300 level has held up as solid resistance, and given the strong appreciation of the Japanese yen we saw on Tuesday, Japanese equities could be in for a fall. Furthermore, general risk aversion throughout the markets may have not had the opportunity to play out in the Nikkei 225, creating additional downside risk for the index during the next trading session.

Terri Belkas is a Currency Analyst for FXCM.