Yen Mildly Higher As CPI Hit 8 Year High

The Yen strengthens mildly in Asian session on higher than expected inflation data. National CPI core rose to 0.8% yoy in August, up from 0.7% yoy, versus consensus of being unchanged at 0.7% yoy. Tokyo CPI core, however, moderated deeper than expected to 0.2% yoy in September, down from 0.4% yoy. The national CPI reading was the highest since 2008. Overall, yen is still bounded in tight range on a number of uncertainties. Domestically, prime minister Abe is set to announce the decision on the planned sales tax hike on October 1. the chance of whether BoJ would expand monetary stimulus would depend on whether there would be measures to offset the impact of the sales take hike. There are speculations that Abe would also announce corporate tax cuts but that is uncertain. From overseas, the yen is struggling to find a direction on uncertainties of Fed's timing of tapering and the situation over US debt ceiling.

The Washington Post indicated that the chance of a US government shutdown is growing. House speaker Boehner stated that the House would not pass a bill which includes funding of the Obamacare plan. Indeed, the House has been using the raise of the debt ceiling as a bargaining chip to delay the introduction of Obamacare by a year. Yet, President Obama has said that he would not accept such a proposal. Several Fed presidents spoke yesterday but the messages were mixed. Minneapolis Fed President Kockerlakota defended the Fed’s maintenance of QE measures and suggested that the central bank should keep interest rates low until the jobless rate reaches at least 5.5%. His comments were in contrary with Richmond Fed President Lacker who stated that the Fed could taper in October. Yet, he added that doing so would result in the Fed "losing face". Fed Governor Stein, however, suggested the Fed to tie QE tapering directly to a specific labor market indicator, such as the unemployment rate. According to Stein, the tapering schedule could be linked to, "a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period. For example, one could cut monthly purchases by a set amount for each further 10 basis point (0.1%) decline in the unemployment rate".

Looking ahead, the Swiss KOF and eurozone confidence indicators would be the main focus in European session, but will likely trigger little reactions. Germany will also release September CPI flash. US will release personal income and spending as well as final reading of U of Michigan sentiment. But investors' mind would stay on next week's NFP release.