Japan to have actually avoided a technical recession

In a relatively quiet week between the ECB and the FOMC, Japan's secondary release of Q3 GDP (Tuesday) and October machinery orders (Wednesday) will be the focal data for the JPY. Firstly, the Q3 GDP is expected to be upgraded to show that Japan actually avoided a technical recession as shown in the preliminary reading. Specifically, Q3 GDP growth is expected to be revised up to +0.7% q/q saar (consensus: +0.2%) from -0.8%, mainly reflecting a large upward revision to private capex (to +1.5% q/q from -1.3%). Secondly, October machinery orders are expected to decrease -3.4% m/m (consensus: -1.6%) after a solid +7.5% gain in September, which would in turn imply a risk that capex would be sluggish in H1 FY16.

The JPY basis swap markets have been extremely volatile over the past month, whilst the spot USDJPY remained confined in a narrow range around 123. Amid the blowout in global cross-currency basis swap spreads, the JPY basis stands out both in terms of its magnitude and its timing. 

A confluence of factors such as rising Fed hike expectations, year-end seasonal pressures, and a Wall Street Journal article about GPIF hedging likely contributed to the widening pressures in JPY basis, in addition to structural factors such as regulatory constraints on the USD supply and strong demand for USD funding by Japanese investors. While JPY basis spreads tend to seasonally tighten into the last weeks of the year, this year's dynamics will attract a close attention as the FOMC is expected to hike its FF rate target at the 15-16 December meeting.