USD/JPY Weekly Forecast: Fed fails to dim dollar prospects
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Subscribe to Premium- US Treasury rates and USD/JPY pull-back in tandem, then reverse
- US data reinforces economic expansion but jobless claims rise
- Federal Reserve Chair Powell maintains dovish rate outlook
- FXStreet Forecast Poll shows little faith in dollar strength
As corrections go this was modest and hardly unexpected.
After finishing at a 12-month high last Wednesday at 110.71 and nearly matching it on Monday at 110.68, the USD/JPY followed US Treasury rates lower for most of the week ending at 109.33 on Thursday.
The two USD/JPY finishes near 110.70 matched highs in the US 10-year Treasury yield on those days. This benchmark bond finished at 1.746% on Wednesday March 31, which was the pandemic and 14-month peak, and this Monday it ended at 1.720%, the top for the week. From Monday’s close the 10-year yield lost nine points to Thursday's finish at 1.632% and the USD/JPY dropped 1.2% to 109.33.
Friday’s rebound from 109.20 support, the effective high from March 8 to March 25, is an indicator that the USD/JPY remains bid. No attempt was made to penetrate the trading band from 109.20 to 108.40. Not surprisingly, the 10-year Treasury yield also reversed on Friday gaining three-and-a-half points to 1.667%, 7:45 am EDT.
To its peak on March 31st,, the USD/JPY had gained 7.8% on the year from its close on January 5 at 102.70. The 10-year return had added 82 basis points from its close of 0.916% on December 31 to its March top at 1.7465.
Minor profit-taking with the retreat in Treasury yields as the catalyst was the straightforward logic for this week’s movement.
US 10-year yield
CNBC
US and Japan data
Evidence continued to mount of the US recovery with the service sector Purchasing Managers Index polling at 63.7 in March a record for its 24-year history, with strong showings in the New Orders and Employment gauges. These Institute for Supply Management’s (ISM) measures complemented the equally buoyant manufacturing PMI and the March national payrolls released last week.
Initial Jobless Claims in the April 2 week at 744,000 were much higher than the 680,000 estimate but had no market impact. Layoffs are now retrograde, looking back to the pandemic lockdowns rather than ahead to economic recovery.
Inflation reared a bit higher with the March Producer Price Index (PPI) rising 1% on the month and 4.2% on the year, well ahead of the 0.5% and 3.8% forecasts.
Normally, PPI increases carry over to consumer pricing within a few months. In the current economic situation, after a year of business failures, it is uncertain if retailers have sufficient sales confidence to raise prices.
Japanese data took its customary back seat though the most recent inputs showed improvement. Consumer Confidence reached a pandemic high in March though it is yet a few points below the January and February 2020 range. Household Spending was much weaker than forecast in February. Perhaps it will reverse with March’s better consumer sentiment.
Federal Reserve
Federal Reserve Chair Jerome Powell, speaking at an International Monetary Fund (IMF) panel on Thursday, said the outlook for the US economy had brightened but that the slow pace of global vaccinations and rising COVID-19 cases in the US are risks and that he expects they will slow the recovery. Commenting on the NFP report, Mr. Powell said the Fed would want to see several more months of like results for progress to its employment goals.
US COVID-19
usafacts.org
The minutes of the March 16-17 FOMC meeting also seemed to undermine the notion that improving US data was bringing the central bank to consider when and how to elide its bond purchases of $120 billion a month.
These views from the Chair and the governors were not new. Similar statements have been made many times the past six months, but by repeating them after a spate of very strong US data, they served to quell speculation that a change in rate policy was brewing. Such anticipation has been one of the drivers of the steep rise in Treasury yields and the dollar.
USD/JPY outlook
Technically, last week's USD/JPY retreat ended at 109.33 just above the 109.20 and 109.00 support lines.These two limits are based on the three weeks of trading from March 8 through March 25 and have sufficient volume to secure a base, provided Treasury rates do not fall much further. The 23.6% Fibonacci level of the 2021 gain at 108.84 should provide additional rebound leverage.
The lower edge of the mid-March trading band at 108.40 is the final, and much weaker band of support. It is the last limit before the rapid eight session climb from 105.50 to 108.50. If the USD/JPY reaches that level, having failed to hold at the more substantial lines above, the momentum will be with the sellers.
American economics and their reflection in interest rates will remain decisive. Chair Powell and the Fed’s caution aside, the play to a resurgent US economy is the main motif for all markets. The US is ahead of the vaccination and recovery curve for almost all of its trading and currency partners except the UK. If that changes it will be because the US has faltered, as Mr Powell fears, not because others have caught up.
Rising COVID-19 cases are in a limited number of Northeast states and Florida and in relatively small numbers, while other states such as Texas, are seeing falling infections. The overall numbers are far below the peaks in December and January.
Even if cases continue to rise, the likelihood of states locking their economies is small. California, whose December and January closure pushed payrolls to a loss, is reopening many of its businesses.
In the week ahead, Thursday’s US Retail Sales could do the most in restoring full economic optimism, 70% of US GDP is tied to consumption. Sales are forecast to rise 4.7% in March, partially due to the $1,400 in stimulus cash delivered to most households. In January, a much smaller $600 payment produced a 7.6% jolt to consumption.
The trading band between 108.50 and 109.25, joined with the still positive US economic outlook and interest rates, should be sufficient to prevent a USD/JPY slide and provide a springboard for a return to 110.00. The caveat is US interest rates. If they fall in the week ahead they will take the Dollar yen with them.
Japan statistics April 5-April 9
Household spending in February was more than three times weaker than expected, worse than in January, and the third negative month in a row. The Japanese consumer economy remains fragile and in no condition to power an economic recovery.
Monday
Jibun Bank Services PMI March 48.3, February 46.3.
Tuesday
Labor Cash EarningsFebruary (YoY) -0.2%, expected -1.5%, January -1.3%. Overall Household Spending February (YoY) -6.6%, expected -2.1%, January -6.1%.
Wednesday
Coincident Index for February 89, expected 89.8, January 90.3. Leading Economic Index for February 99.7, expected 100.7, January 98.5.
Thursday
Consumer Confidence Index March 36.1, February 33.8. Eco Watchers Survey Outlook March 49.8, February 51.3. Eco Watchers Survey Current March 49, February 41.3.
US statistics April 5-April 9
The US economy accelerated in March with business optimism in the service sector reaching an all time-high. The Purchasing Managers Index (PMI) at 63.7 and the New Orders Index at 67.2 were records for the 24 year-old series.
The Employment Index had the best score in 22 months. This data built on last week’s equally good PMI levels in manufacturing and the excellent payroll report that saw nearly one million people hired last month.
The FOMC minutes of the March 16-17 meeting repeated the Fed insistence that full economic recovery must come before the bank reduces its bond purchase program that is repressing the short end of the yield curve.
Monday
Institute for Supply Management (ISM) Services Purchasing Managers’ Index for March 63.7, expected 58.5, February 55. Employment Index 57.2, expected 53.9, February 52.7. New Orders Index 67.2, February 51.9. Prices Paid 74, expected 68.3, February 71.8. Factory Orders February -0.8%, expected -0.5%, January 2.7%.
Tuesday
JOLTS Job Openings for February 7.367 million, expected 6.995 million, January 7.099 million.
Wednesday
Federal Reserve Open Market Committee March 16-17 minutes, no change in policy or economic apprehension.
Thursday
Initial Jobless Claims April 2 week 744,000, expected 680,000, prior 728,000. Continuing Claims March 26 week 3.734 million, expected 3.65 million, prior 3.75 million.
Friday
Producer Price Index (PPI) March (MoM) 1%, expected 0.5%, February 0.5%, PPI (YoY) 4.2%, expected 3.8%, February 2.8%. Core PPI (MoM) 0.7%, expected 0.2%, February 0.2%. Core PPI (YoY) 3.1%, expected 2.7%, February 2.5%. Wholesale Inventories February expected 0.5%, January 0.5%
FXStreet
Japan statistics April 12-April 16
Monday
Produce Price Index for March, February 0.4% (MoM), -0.7% (YoY). Machine Tool Orders March (YoY), February 36.7%.
Wednesday
Machinery Orders February, January -4.5% (MoM), 1.5% (YoY).
US statistics April 12-April 16
Retail Sales in March will garner the most attention and should confirm the economy’s acceleration. Consumer prices are next in interest even though the Federal Reserve has removed them from active policy consideration.
Tuesday
Consumer Price Index (CPI) for March (MoM) expected 0.5%, February expected 2.4%, February 1.7%. Core CPI (MoM) expected 0.2%, February 0.1%. Core CPI (YoY) expected 1.5%, February 1.3%. National Federation of Independent Business Optimism Index (NFIB) March, February 95.8.
Wednesday
Import Price Index March (MoM) expected 1%, February 1.3%. Import Price Index March (YoY) March, February 3%. Export Price Index March (MoM) expected 1%, February 1.6%. Export Price Index March (YoY), February 5.2%.
Thursday
Retail Sales March expected 4.7%, February -3%. Retail Sales ex Autos March expected 3%, February -2.7%. Retail Sales Control Group march expected -0.9%, February -3.5%. Industrial Production March expected 1.6%, February -2.2%. Capacity Utilization March expected 75.4%, February 73.8%. Initial Jobless Claims April 9 week, prior 744,000. Continuing Claims April 2 week, prior 3.734 million. NAHB Housing Market Index April, expected 84, March 82.
Friday
Building Permits March, expected 1.75 million (annualized), February 1.72 million. Housing Starts March, expected 1.613 million (annualized), February 1.421 million. Michigan Consumer Sentiment Index April (preliminary) expected 88.6, March 84.9.
USD/JPY technical outlook
The strong rebound from support at 109.20 and the extensive band down to 108.40 is a clear indication that the USD/JPY will test higher. The failure to approach the 23.6% Fibonacci level of the January to March gain, the first step in a sustained profit-taking correction, is a second notice of intent.
Resistance at 110.20 and 110.75 is founded in the recent six session break above 110.00 and is not backed by extensive trading.
The limits above these two go back to the pandemic peaks in February and March of last year and are correspondingly weak. Initial support at 109.50 is strengthened by the 21-day moving average (MA) at 109.52 and the next lines at 109.20 and 109.00 are substantial. The 100-day MA and 200-day are nearly identical at 105.69 and 105.67 but not pertinent to current trading. The Relative Strength Index turned higher on Friday and at 59.91 is a buy signal.
Resistance: 110.20, 110.75, 111.00, 111.70
Support: 109.50, 109.20, 109.00, 108.40, 108.00, 107.30
FXStreet Forecast Poll
While the analysts polled for the FXStreet Forecast Poll are evenly split on the USD/JPY's ability to hold above 109.50 support in the week ahead, they are overwhelmingly bearish out to one quarter. From a technical standpoint, the chief aspect of the USD/JPY's current position is its rapid rise this year and its vulnerability to correction. Countering that view is the fundamental change in the USD/JPY wrought by the rise in US interest rates. If that continues, technical considerations are secondary.
- US Treasury rates and USD/JPY pull-back in tandem, then reverse
- US data reinforces economic expansion but jobless claims rise
- Federal Reserve Chair Powell maintains dovish rate outlook
- FXStreet Forecast Poll shows little faith in dollar strength
As corrections go this was modest and hardly unexpected.
After finishing at a 12-month high last Wednesday at 110.71 and nearly matching it on Monday at 110.68, the USD/JPY followed US Treasury rates lower for most of the week ending at 109.33 on Thursday.
The two USD/JPY finishes near 110.70 matched highs in the US 10-year Treasury yield on those days. This benchmark bond finished at 1.746% on Wednesday March 31, which was the pandemic and 14-month peak, and this Monday it ended at 1.720%, the top for the week. From Monday’s close the 10-year yield lost nine points to Thursday's finish at 1.632% and the USD/JPY dropped 1.2% to 109.33.
Friday’s rebound from 109.20 support, the effective high from March 8 to March 25, is an indicator that the USD/JPY remains bid. No attempt was made to penetrate the trading band from 109.20 to 108.40. Not surprisingly, the 10-year Treasury yield also reversed on Friday gaining three-and-a-half points to 1.667%, 7:45 am EDT.
To its peak on March 31st,, the USD/JPY had gained 7.8% on the year from its close on January 5 at 102.70. The 10-year return had added 82 basis points from its close of 0.916% on December 31 to its March top at 1.7465.
Minor profit-taking with the retreat in Treasury yields as the catalyst was the straightforward logic for this week’s movement.
US 10-year yield
CNBC
US and Japan data
Evidence continued to mount of the US recovery with the service sector Purchasing Managers Index polling at 63.7 in March a record for its 24-year history, with strong showings in the New Orders and Employment gauges. These Institute for Supply Management’s (ISM) measures complemented the equally buoyant manufacturing PMI and the March national payrolls released last week.
Initial Jobless Claims in the April 2 week at 744,000 were much higher than the 680,000 estimate but had no market impact. Layoffs are now retrograde, looking back to the pandemic lockdowns rather than ahead to economic recovery.
Inflation reared a bit higher with the March Producer Price Index (PPI) rising 1% on the month and 4.2% on the year, well ahead of the 0.5% and 3.8% forecasts.
Normally, PPI increases carry over to consumer pricing within a few months. In the current economic situation, after a year of business failures, it is uncertain if retailers have sufficient sales confidence to raise prices.
Japanese data took its customary back seat though the most recent inputs showed improvement. Consumer Confidence reached a pandemic high in March though it is yet a few points below the January and February 2020 range. Household Spending was much weaker than forecast in February. Perhaps it will reverse with March’s better consumer sentiment.
Federal Reserve
Federal Reserve Chair Jerome Powell, speaking at an International Monetary Fund (IMF) panel on Thursday, said the outlook for the US economy had brightened but that the slow pace of global vaccinations and rising COVID-19 cases in the US are risks and that he expects they will slow the recovery. Commenting on the NFP report, Mr. Powell said the Fed would want to see several more months of like results for progress to its employment goals.
US COVID-19
usafacts.org
The minutes of the March 16-17 FOMC meeting also seemed to undermine the notion that improving US data was bringing the central bank to consider when and how to elide its bond purchases of $120 billion a month.
These views from the Chair and the governors were not new. Similar statements have been made many times the past six months, but by repeating them after a spate of very strong US data, they served to quell speculation that a change in rate policy was brewing. Such anticipation has been one of the drivers of the steep rise in Treasury yields and the dollar.
USD/JPY outlook
Technically, last week's USD/JPY retreat ended at 109.33 just above the 109.20 and 109.00 support lines.These two limits are based on the three weeks of trading from March 8 through March 25 and have sufficient volume to secure a base, provided Treasury rates do not fall much further. The 23.6% Fibonacci level of the 2021 gain at 108.84 should provide additional rebound leverage.
The lower edge of the mid-March trading band at 108.40 is the final, and much weaker band of support. It is the last limit before the rapid eight session climb from 105.50 to 108.50. If the USD/JPY reaches that level, having failed to hold at the more substantial lines above, the momentum will be with the sellers.
American economics and their reflection in interest rates will remain decisive. Chair Powell and the Fed’s caution aside, the play to a resurgent US economy is the main motif for all markets. The US is ahead of the vaccination and recovery curve for almost all of its trading and currency partners except the UK. If that changes it will be because the US has faltered, as Mr Powell fears, not because others have caught up.
Rising COVID-19 cases are in a limited number of Northeast states and Florida and in relatively small numbers, while other states such as Texas, are seeing falling infections. The overall numbers are far below the peaks in December and January.
Even if cases continue to rise, the likelihood of states locking their economies is small. California, whose December and January closure pushed payrolls to a loss, is reopening many of its businesses.
In the week ahead, Thursday’s US Retail Sales could do the most in restoring full economic optimism, 70% of US GDP is tied to consumption. Sales are forecast to rise 4.7% in March, partially due to the $1,400 in stimulus cash delivered to most households. In January, a much smaller $600 payment produced a 7.6% jolt to consumption.
The trading band between 108.50 and 109.25, joined with the still positive US economic outlook and interest rates, should be sufficient to prevent a USD/JPY slide and provide a springboard for a return to 110.00. The caveat is US interest rates. If they fall in the week ahead they will take the Dollar yen with them.
Japan statistics April 5-April 9
Household spending in February was more than three times weaker than expected, worse than in January, and the third negative month in a row. The Japanese consumer economy remains fragile and in no condition to power an economic recovery.
Monday
Jibun Bank Services PMI March 48.3, February 46.3.
Tuesday
Labor Cash EarningsFebruary (YoY) -0.2%, expected -1.5%, January -1.3%. Overall Household Spending February (YoY) -6.6%, expected -2.1%, January -6.1%.
Wednesday
Coincident Index for February 89, expected 89.8, January 90.3. Leading Economic Index for February 99.7, expected 100.7, January 98.5.
Thursday
Consumer Confidence Index March 36.1, February 33.8. Eco Watchers Survey Outlook March 49.8, February 51.3. Eco Watchers Survey Current March 49, February 41.3.
US statistics April 5-April 9
The US economy accelerated in March with business optimism in the service sector reaching an all time-high. The Purchasing Managers Index (PMI) at 63.7 and the New Orders Index at 67.2 were records for the 24 year-old series.
The Employment Index had the best score in 22 months. This data built on last week’s equally good PMI levels in manufacturing and the excellent payroll report that saw nearly one million people hired last month.
The FOMC minutes of the March 16-17 meeting repeated the Fed insistence that full economic recovery must come before the bank reduces its bond purchase program that is repressing the short end of the yield curve.
Monday
Institute for Supply Management (ISM) Services Purchasing Managers’ Index for March 63.7, expected 58.5, February 55. Employment Index 57.2, expected 53.9, February 52.7. New Orders Index 67.2, February 51.9. Prices Paid 74, expected 68.3, February 71.8. Factory Orders February -0.8%, expected -0.5%, January 2.7%.
Tuesday
JOLTS Job Openings for February 7.367 million, expected 6.995 million, January 7.099 million.
Wednesday
Federal Reserve Open Market Committee March 16-17 minutes, no change in policy or economic apprehension.
Thursday
Initial Jobless Claims April 2 week 744,000, expected 680,000, prior 728,000. Continuing Claims March 26 week 3.734 million, expected 3.65 million, prior 3.75 million.
Friday
Producer Price Index (PPI) March (MoM) 1%, expected 0.5%, February 0.5%, PPI (YoY) 4.2%, expected 3.8%, February 2.8%. Core PPI (MoM) 0.7%, expected 0.2%, February 0.2%. Core PPI (YoY) 3.1%, expected 2.7%, February 2.5%. Wholesale Inventories February expected 0.5%, January 0.5%
FXStreet
Japan statistics April 12-April 16
Monday
Produce Price Index for March, February 0.4% (MoM), -0.7% (YoY). Machine Tool Orders March (YoY), February 36.7%.
Wednesday
Machinery Orders February, January -4.5% (MoM), 1.5% (YoY).
US statistics April 12-April 16
Retail Sales in March will garner the most attention and should confirm the economy’s acceleration. Consumer prices are next in interest even though the Federal Reserve has removed them from active policy consideration.
Tuesday
Consumer Price Index (CPI) for March (MoM) expected 0.5%, February expected 2.4%, February 1.7%. Core CPI (MoM) expected 0.2%, February 0.1%. Core CPI (YoY) expected 1.5%, February 1.3%. National Federation of Independent Business Optimism Index (NFIB) March, February 95.8.
Wednesday
Import Price Index March (MoM) expected 1%, February 1.3%. Import Price Index March (YoY) March, February 3%. Export Price Index March (MoM) expected 1%, February 1.6%. Export Price Index March (YoY), February 5.2%.
Thursday
Retail Sales March expected 4.7%, February -3%. Retail Sales ex Autos March expected 3%, February -2.7%. Retail Sales Control Group march expected -0.9%, February -3.5%. Industrial Production March expected 1.6%, February -2.2%. Capacity Utilization March expected 75.4%, February 73.8%. Initial Jobless Claims April 9 week, prior 744,000. Continuing Claims April 2 week, prior 3.734 million. NAHB Housing Market Index April, expected 84, March 82.
Friday
Building Permits March, expected 1.75 million (annualized), February 1.72 million. Housing Starts March, expected 1.613 million (annualized), February 1.421 million. Michigan Consumer Sentiment Index April (preliminary) expected 88.6, March 84.9.
USD/JPY technical outlook
The strong rebound from support at 109.20 and the extensive band down to 108.40 is a clear indication that the USD/JPY will test higher. The failure to approach the 23.6% Fibonacci level of the January to March gain, the first step in a sustained profit-taking correction, is a second notice of intent.
Resistance at 110.20 and 110.75 is founded in the recent six session break above 110.00 and is not backed by extensive trading.
The limits above these two go back to the pandemic peaks in February and March of last year and are correspondingly weak. Initial support at 109.50 is strengthened by the 21-day moving average (MA) at 109.52 and the next lines at 109.20 and 109.00 are substantial. The 100-day MA and 200-day are nearly identical at 105.69 and 105.67 but not pertinent to current trading. The Relative Strength Index turned higher on Friday and at 59.91 is a buy signal.
Resistance: 110.20, 110.75, 111.00, 111.70
Support: 109.50, 109.20, 109.00, 108.40, 108.00, 107.30
FXStreet Forecast Poll
While the analysts polled for the FXStreet Forecast Poll are evenly split on the USD/JPY's ability to hold above 109.50 support in the week ahead, they are overwhelmingly bearish out to one quarter. From a technical standpoint, the chief aspect of the USD/JPY's current position is its rapid rise this year and its vulnerability to correction. Countering that view is the fundamental change in the USD/JPY wrought by the rise in US interest rates. If that continues, technical considerations are secondary.
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