Morning Bid: Nervy end to volatile week, yen eyes breakthrough

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

Investors in Asia close out a choppy week hoping for calm on Friday but wary that U.S. growth fears are bubbling just under the surface and that the U.S. economic and policy landscape next week could be extremely challenging again.

U.S. employment data on Friday, after Asia’s close, will set the tone for world markets up until the Fed announces its interest rate decision and revised economic projections on Sept. 18.

Investors are on edge.

The MSCI World index and S&P 500 are on course for their biggest weekly losses since April, the MSCI Asia ex-Japan and Nikkei 225 are on course for their steepest losses in six weeks, and Shanghai stocks on Thursday plumbed a fresh seven-month low.

Japan’s Nikkei is down 5% this week, and could fall further if the yen continues to appreciate. The dollar dipped below 143.00 yen on Thursday for the first time since Aug. 5 and momentum appears to be to the downside.

With a stronger currency in their pocket, Japanese investors are hoovering up assets overseas. Figures on Thursday showed that they were net buyers of foreign bonds for a fifth week, and net buyers of foreign stocks for a third week.

The Fed’s policy decision later this month could be the catalyst for dollar/yen to test 140.00. San Francisco Fed President Mary Daly told Reuters on Wednesday that interest rates need to come down, although she didn’t say how quickly.

Japanese rates, meanwhile, should continue to rise but at a pace that ensures volatile markets do not harm businesses, Bank of Japan board member Hajime Takata said on Thursday.

On the face of it, Fed rate cuts and more BOJ tightening is a recipe for further yen strength. But a lot is already priced into the U.S. curve – over 100 basis points of easing this year and some 225 bps by the end of next year.

Japanese household spending data for July will be released on Friday, following figures on Thursday that showed real wages rose in July for a second month. Until June, inflation-adjusted wages had fallen every month for more than two years.

Strong wage and spending growth will keep the BOJ more inclined to raise rates again, in turn fueling further yen upside.

Many other Asian currencies have been on an impressive upswing in recent weeks too, clawing back most of their losses for the year or even moving into positive territory year-to-date.

The Asian calendar is light on Friday, with South Korean current account figures for August among the few highlights. Seven countries, including Japan, will release their latest FX reserves holdings, which at the last count totaled around $3 trillion.

Here are key developments that could provide more direction to Asian markets on Friday:

– South Korea current account (August)

– Japan household spending (July)

– Japan FX reserves (August)