USD/JPY Forecast: Dollar risk premium fades, US payrolls offer relief
|- Dollar risk premium in a five week decline.
- Chinese export growth supports yen at week’s high.
- Positive dollar response to ADP and NFP suggest a return to economic comparison.
Falling yields in the 2-year US Treasury and the slow abatement of the dollar risk premium extended the five week long decline in the USD/JPY through Thursday but Friday’s NFP report provided an unexpected boost.
American non-farm payrolls proved less grim than feared and the resulting dollar relief checked but did not break the negative trend in the USD/JPY despite another record low yield in the US 2-year Treasury.
Chinese exports on Wednesday, had provided support to the yen which closed on the day at 106.12 the high for the week. April exports unexpectedly rose 3.5%, far in advance of the -15.7% forecast and after falling for two straight months and four of the last six.
China claims to have reopened most of its economy but many of its export destinations are still closed and it is unclear if factories will produce and stockpile goods as they wait for the rest of the world to end its lockdown.
The highly anticipated April US payroll data presented 20.5 million lost jobs slightly fewer than the 22 million forecast and a 14.7% unemployment rate, a bit higher than the 14% estimate.
Trading at 106.30 just before the NFP release the dollar yen immediately climbed to 106.70, the high for the day, retaining the gain to the close at 106.70.
After seven weeks of record jobless claims and Wednesday’s 20 million loss in ADP payrolls, markets had long since priced in a dismal April figure. The NFP report also obviated the fear for a much worse payroll's result. Though the estimates for the ADP were accurate, the novelty of the economic situation made for more than the usual amount of uncertainty heading into the Labor Department statistic.
The Dow had gained about 1.7% in late afternoon trading, S&P 500 about 1.5% and the US 10-year Treasury yield was up five basis points to 0.683%. The yield on the 2-year reversed its earlier losses to a new record low of 0.125% and added three points to 0.155%. The Federal Reserve’s $500 billion bond purchase program in support of the pandemic stricken US economy is focused on the short end of the Treasury curve.
USD/JPY outlook
The six week downtrend in the USD/JPY has been a function of the slow fade of the dollar risk premium instilled at the height of the pandemic panic in February and March.
Over the past two weeks there have been intermittent signs that comparative economics are again entering the trading equation. Friday’s positive dollar reaction to US payrolls was another of those reoccurring indications. A full return to currency and economic comparison will await actual improvement in statistics, simply not as bad as expected will not be sufficient.
The down pennant that extends the length of the current trend was breached but not broken with Friday’s move. The inability to conclusively punch through to 107.00 probably means the constricting and still active formation will rule next week’s trading. Longer term the yen has few advantages.
Japanese Statistics May 4-May 8
Thursday
Overall household spending fell 6% in March a bit less than the -6.7% forecast though much lower than the -0.3% February. It was the sixth negative month in a row and the largest drop in the run.
The Jibun Bank Services PMI for April came in a 21.5, missing the 22.8 estimate and well below March’s 33.8. It was the lowest score in course of this new series that began in March 2017.
Japanese statistics May 11-May 15
Tuesday
The Coincident Index which summarizes the overall Japanese economy for March. The February score was 95.5 which was the lowest since 93.8 in March 2013.
Leading economic indicators for March. February was 91.7 the highest since last September but at the low end of the range for the last decade.
Preliminary annualized GDP for the first quarter. Growth in the fourth quarter of 2019 fell 7.1% on an annualized basis and 1.8% quarter to quarter. It was the lowest annual and quarterly rates since the second quarter of 2014. The GDP deflator for the first quarter, the rate in the final quarter of 2019 was 1.2% up from 0.6% in Q3.
Wednesday
Eco Watchers survey for April which follows regional economic trends. The outlook survey was 18.8 in March, the lowest since January 2009 and the current survey was 14.2, its weakest in its 19 year history.
Japanese statistics conclusion
As March statistics give way to April the indications for the Japanese economy continue to fade. The Jibun bank services index at for April at 21.5 and the March score of 33.8 were the two lowest reading in the series.
First quarter GDP will likely confirm Japan entered its fourth recession since the financial crisis of a decade ago. Second quarter GDP should set a post-war record for contraction, a dubious achievement Japan will share with many other industrial nations.
As markets return to comparative economic and rate advantage the Japanese economy will provide weak support for its currency. After the risk premium is filched from the dollar, the yen will stand bare.
US statistics May 4-May 15
US statistics May 11-May 15
The slow drift lower in the USD/JPY as the risk premium leaches from the dollar has been the dominating trend back to the last week in March. The USD/JPY is now at the level of last August and September before the gradual rise to the pandemic launch at 110.00.
The relative strength index reflects the slippage in the pair rather than a fall and at a little above the mid-point between neutral and oversold it indicates a moderate bias lower but no great conviction.
All three moving averages, 21,100 and 200 day were crossed lower more than two weeks ago and that retains a negative bias for the USD/JPY but the fundamental not technical nature of the risk premium withdrawal argues for a limited application. The tentative move through the upper border of the down pennant on Friday needs confirmation next week before the formation recedes in importance but as the apex is very close its influence will end or way or the other.
Resistance: 106.70; 107.25 (21-day MV); 108.00; 108.25 (100-day MV); 108.60; 109.00
Support: 106.20; 105.75; 105.35: 104.90; 104.50
USD/JPY sentiment poll
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