- USD / JPY continues its prolonged, orderly and slow technical descent.
- The strength of the yen and the general weakness of the US dollar are eroding the USD / JPY.
- U.S. Treasury yields are fading as markets worry about virus spread and closures.
- The yen is favored by real interest rates and modest security trade.
- FXStreet Forecast poll predicts bottom but no rebound
If the USD / JPY had its biggest one-day rally since the March panic with the announcement of the Pfizer vaccine on November 9, the dollar’s steady decline over the next nine sessions is proof, if it was needed, that the overwhelming reality of the pandemic is still the primary factor in the markets.
On Monday, USD / JPY closed at 105.36, up exactly two digits from its opening. From November 12 high at 105.40 to Friday’s close at 103.83, the pair lost 77.5% of its gains.
Technically, the USD / JPY remains immersed in a descending channel which can be extended until December 2016, although the much narrower channel of early July is more relevant for current trading. Support is mainly at 103.30 which marks the low on November 6th and the rally start line on the 9. These are the lowest points since the crash and immediate recovery in March.
The accelerating rise in COVID-19 diagnoses in the United States, although there have been similar increases in Europe and to a lesser extent in Japan, has undermined the reliance on U.S. dollar security trading. The evolution of the pandemic in the United States and the potential for economic damage have kept the greenback on the general defensive since the beginning of the month. The yen’s traditional safe-haven status contributed to the dollar’s decline.
The yen was favored by the real interest rate differential, mainly due to very low inflation in Japan. Even though the Bank of Japan’s overnight call rate is -0.1%, the National Consumer Price Index (CPI) registered -0.4% for the year in November. By comparison, the midpoint of the Fed Funds target range is 0.125%, but the annual US CPI in October was 1.2%. The yen is strengthened by deflation and the dollar is weakened more by inflation than the difference in base interest rates.
Falling yields on US Treasuries are also undermining the dollar. The 10-year Treasury yield is off 15 basis points after hitting a three-month high on November 10 of 0.972%. The bond closed at 0.826% on Friday.
Japanese statistics from November 16 to November 20
Japanese statistics gave the market no momentum this week. However, the advent of deflation in the October national CPI figures is a source of concern for the economy and the Bank of Japan.
The revisions to industrial production figures for September were in line with expectations: 3.9% per month against 4.0% and unchanged at 9% on the year.
Imports fell 13.3% year-over-year in October, more than the estimate of -9%, but not as small as the 17.4% drop in September. It was the 18th consecutive drop. Exports fell 0.2% over the year, much better than the forecast of -4.5% and the 4.9% drop in September. This was the smallest decrease in 22 consecutive negative months.
The national CPI fell 0.4% year-on-year in October, missing the forecast of 0.3% and falling sharply from the flat in September. This was the first outright deflation since September 2016. Core CPI was -0.2% also down from September’s stability.
Jibun Bank’s manufacturing PMI for November was 48.3 from 48.7 previously. The forecast was 48.9. The contractual chain is 19 months.
US statistics from November 16 to November 20
U.S. economic information was also limited and overshadowed by the economic impact of the pandemic.
Retail sales in October fell short of expectations after five strong months, increasing 0.3% on a forecast of 0.5% and September was revised to 1.6% from 1.9%. Non-auto sales increased 0.2% with a projection of 0.6% and the September result was reduced from 1.5% to 1.2%. The control group added 0.1% on a forecast of 0.5% and its previous one was revised to 0.9% from 1.4%.
Industrial production added 1.1 %% in October, roughly the forecast of 1.0%, while September was revised to -0.4% from 0.6%. Capacity utilization rose to 72.8% from 72% in October.
The residential construction industry remained strong. Building permits were unchanged at 1.545 million in October, and housing starts rose to 1.53 million from 1.459 million annualized.
Initial jobless claims soared to 742,000 in the week of November 13, from 711,000. This was the first increase in nine weeks and highlighted concerns that pandemic restrictions imposed in several states result in layoffs. Continuing claims fell to 6.372 million the week of November 6, from 6.801 million previously.
Existing home sales, 90% of the US market, rose 4.3% in October to an annualized rate of 6.85 million. This was the highest sales rate since the real estate bubble of more than ten years ago.
USD / JPY Outlook
Currency markets ready to reward dollar for improving global economy, witness USD / JPY soar on November 9th.
In order for this to become a general trend and overcome the persistent and long-term inclination to go down, the United States will need to overcome its COVID-19 epidemic. Until infection rates drop and the threat to the economy is lifted, the dollar and USD / JPY will not be able to enjoy the historically better growth in the United States.
Technically, all indicators point lower. The descending channel is intact and well defined. Resistance lines starting at 104.30 are more abundant and supported by much larger price action. The moving averages are all above market levels.
Countering the downtrend, or potentially doing so, are two fundamental factors. First, the USD / JPY is approaching the near 100 yen range where the last reversal was in November and December 2016. The Japanese government will not want to weigh down any rally with an expensive yen. Second, the dollar’s recovery awaits a clear signal from the US economy.
The COVID-19 pandemic has dominated the markets for nine months. Hopefully vaccines will end their grip and allow normal economic activity, but that recovery could still happen in a few months.
Japanese statistics 23 November-27 November
Domestic prices slipped into deflation in October and this is expected to continue in November with the Tokyo CPI. The overall index is expected to fall to -0.6% from -0.3% and the core to core index is expected to rise to -0.1% from -0.2% in October.
The Bank of Japan fought a long battle against the recurring episodes of deflation that plagued the Japanese economy. Price changes were last negative in 2016 and early 2017. The return of outright deflation in just over three years, even accompanying the unusual circumstance of the pandemic, must be of major concern for Japanese economy and monetary policy BOJ.
US statistics from November 23 to November 27
In the slew of US data arriving Wednesday, dubbed for the Thanksgiving holiday Thursday, initial jobless claims take precedence. The unexpected increase of 31,000 last week may have been the first notice of a new round of layoffs due to trade restrictions imposed in many states or it may be a normal variation. If it is seconded by another rise, look for markets to get it out of the dollar.
Markit’s manufacturing and services PMI for November should confirm sentiment is leveling off – 53 in manufacturing versus 53.4 in October and 55.5 in services versus 56.9.
Durable goods orders for October are expected to rise 1% after the 1.9% increase in September. Durable goods orders excluding transport are expected to increase by 0.4% after 0.9% in September. Orders for non-aircraft non-defense equipment are expected to rise 0.5% in October. They increased by 1% in September.
Personal income in October is expected to increase 0.1% from 0.9% previously and personal spending 0.4% after rising 1.4% in September.
Initial jobless claims during the week of November 20 are expected to fall to 725,000 from 742,000. Continuing claims stood at 6.372 million the week of November 13.
Third-quarter annualized GDP is expected to remain unchanged at 33.1% when last revised. New home sales are forecast to increase 1.8% in October to an annual rate of 970,000.
The Personal Consumption Expenditure Price Index rose 0.2% in September and 1.4% for the year. The Core PCE index should be stable in September and 1.4% over the year.
USD / JPY technical outlook
Even with the steep decline this week, the USD / JPY is poised to take further losses. The descending channel has not lost its grip on trading.
The relative strength index stands at 39.54, down from 46.27 on Monday. The index reached 27.59 on November 6 when the USD / JPY closed at 103.30. The 21 day moving average was breached on November 13th and at 104.50 is around a figure above the market and facing resistance at 104.60. Day 100 at 105.64 coincides with resistance at 105.65. The 200 days at 106.76 is out of consideration. The support at 103.00 is very good that the two lines above are not. Resistance at 104.60 and 105.00 are the pillars above.
Resistance: 104.30; 104.60; 105.00; 105.45; 105.65
Support: 103.55; 103.30; 103.00.
Weekly USD / JPY Forecast Survey
From last week’s uniformly bearish outlook, only the nowcast at 103.50 remains. The rebound in the one-month outlook is minimal. That this is not a turn is confirmed by the neutral reading at a quarter. USD / JPY is waiting for a change in the pandemic.