Chinese Yuan poses upside risk for USDJPY; Q2 GDP in focus

The combination of a slower Chinese growth and cheaper CNY (and other Asian currencies which combined with China carry a 49% weight in JPY REER) should put upward pressure on the yen to depreciate against USD, even if the BoJ is expected to refrain from materially changing its monetary policy for now. 

"Our views on China suggest that our USDJPY forecast (123 at year-end) now has upside risk. We see the USDJPY stability of recent days as mostly justified by the risk-off environment but, as soon as the bid for safe haven currencies begin to fade and Asia currencies depreciate, would expect USDJPY to drift higher," says Barclays.

In terms of data releases this week, Q2 real GDP (Monday) is expected to decline -1.9% q/q saar (consensus: -1.8%), for the first time since post-VAT contraction last year, led by downturn in consumption and drag from net exports. The risks to the assumption for private consumption may be skewed to the further downside. 

Weaker GDP data could raise some concerns on Japan's economic recovery and may weigh on JPY, along with the above mentioned impact from Chinese developments. In terms of other data, the July Trade Balance (Wednesday) is expected to register JPY73bn in deficits (consensus: -54bn).