USD/JPY Forecast: Dollar completes pandemic recovery

• USD/JPY Forecast: Dollar completes pandemic recovery.
• USD/JPY emerges after 11 weeks at its pre-pandemic trading level, gains 1.6% in June.
• Unexpectedly strong US non-farm payrolls boosted dollar.
• US equities Treasury yields soar on payrolls report.
• US-China trade deal performs despite some mutually antagonistic rhetoric.

The violent gyrations inflicted on the currency markets by the advent of the coronavirus pandemic that dropped the USD/JPY 10% in two weeks from February 19 to March 9 and then immediately reversed into a 10% climb in the following two weeks to March 24, ended on Friday with the pair at 109.60 just points from its February inception.

Over the past three weeks the US dollar has surrendered all of its remaining acquired risk-premium as the pandemic has receded permitting economies in Europe and North American to resume partial or normal commercial activity.  Viral cases and fatalities continue to decline in most areas, New York City hard hit in the recent rioting, had it first day in three months without a virus attributed death.

The dollar was also supported by shockingly strong US jobs data. Non-farm payrolls added 2.509 million jobs in May following the April loss of 20.687 million.  The 10.5 million swing from the -8 million consensus estimate is the largest in payroll history. The unemployment rate dropped to 13.3% from 14.7%, reversing the 19.8% forecast.

US Trade Representative Robert Lighthizer said that he was pleased with the progress China was making carrying out its obligations under the Phase One trade agreement. 

“In many ways it was March 1 before they [could] get some of their things in place, so if you look at what they've done since March, 1 – and given the context of this crazy virus – I think they've done a pretty good job,” Lighthizer said in a speech at the Economic Club of New York on Thursday.  “I think the people with whom I negotiated this are honorable people and want it to be a success.”*

President Trump has repeatedly criticized China for its response and transparency during the coronavirus crisis and for its newly passed Hong Kong security law.   

The trade deal was signed on January 15 in Washington and went into effect on February 14. One of the early tests will be the Chinese commitment to buy an additional $200 billion in US agricultural products.

In reference to those terms Mr. Lighthizer said that the administration has seen “significant purchases.”

Monday’s (6/1) run higher accelerated as the USD/JPY approached and then breached the 108.00 resistance line that had been intact on the daily and hourly charts since mid-April.

*Quoted on FoxBusiness.com

USD/JPY outlook

The return of the USD/JPY to near the top of its 12-month range, excepting the Bactrian camel of the pandemic, places the pair in a position to move higher if a number of conditions remain favorable.

First, the exit from pandemic must stay on track. An appreciable return of the virus in China the US or elsewhere especially if accompanied by reinstituted economic closures could bring back the yen safety trade.

Second, the emerging recovery of the American, Chinese and global economies from their two month forced hiatus must continue and accelerate. The US non-farm payrolls surprise and the China’s manufacturing and service PMI reading for May suggest that the recovery could be faster and stronger than anticipated by most observers. The proverbial v-shaped surge in growth is now a distinct possibility. It is not guaranteed.

Third, the US-China trade relationship, whatever the rhetoric between the two governments, needs to proceed in fulfilling the terms of the agreement.  Presidents Xi Jinping and Donald Trump need this agreement to work and deliver economic growth to their economies. Practicality not ideology should keep the trade relationship functional even if the political one strays into acrimony now and again.

Fourth, although the Fed has committed to maintaining low interest rates until the economy has cleared the pandemic damage, a quickening recovery will push US rates higher even as the Fed continues its bond price supports.  

Japanese statistics June 1-June 5

Monday

The Jibun Bank manufacturing PMI confirmed its 38.4 reading for May, the lowest since the recession of 2009.  The monetary base expanded 3.9% on the year in May, almost double the 2.3% rate in April as the Bank of Japan provided extra liquidity to the economy as part of the pandemic defense.

Wednesday

The Jibun Bank services PMI rose from 21.5 in April to 26.5 in May.

Thursday

Overall household spending in April declined 11.1% much worse than the 6% drop in March but notably better than the -15.4% forecast.

Friday

The Coincident Index which assays the overall Japanese economy, fell to 81.5 in April from 88.8 in March and missing the 90.3 consensus estimate.  Leading economic indicators for April registered 76.2 in April, down from 85.1 in March and beneath the 80.5 projection.

US statistics June 1-June 5

Monday

Purchasing managers’ indexes for May in manufacturing improved on their April numbers.  The overall index rose to 43.1 from 41.5, the new orders gauge climbed to 31.8 from 27.1 and the employment PMI increased to 32.1 from 27.5.  Construction spending in April fell 2.9%, less than half the -6.5% prediction.

Tuesday

Total vehicle sales jumped to 12.2 in May from 11.4 in April.

Wednesday

ADP employment change for May at -2.76 million on a -9 million forecast and -19.557 million loss in April was a surprise and predictor for Friday’s NFP.  The May services PMI figures were, as their manufacturing counterparts a slight turn up from April. The overall index rose to 45.4 from 41.8, the new orders index jumped to 41.9 from 32.9 in April and the employment index edged to 31.8 from 30.

Thursday

Initial jobless claims added 1.877 million to the rolls down from the prior week’s 2.126 million.  Continuing claims rose from 20.838 million to 21.487 million as the average weekly increase drops.

Friday

Non-farm payrolls expanded 2.509 million workers vastly different than the -8 million forecast and last week’s record -20.687 decline. The unemployment rate dropped to 13.3%, reversing the 19.8% projection and last month’s 14.7% 82 year record. The underemployment rate slipped to 21.2% from 22.8%.  Average hourly earnings increases on the year fell to 6.7% from 8% in April as lower paid workers to their jobs. Average hourly earnings on the month fell 1%% after rising 4.7% in April.  The labor force participation rate climbed to 60.8% from 60.2%.

Japanese and US statistics summary June 1-June 5

While Japan has yet to see the full accounting from the pandemic collapse the huge surprise of its May payrolls illustrates the far greater dynamism of the US economy.  It is more painful for its participants than the Japanese model on occasion but it provides more flexible and varied responses and its potential for growth is considerably higher.

As the economic recovery evolves it is probable that the greater collapse in the United States will deliver a far stronger and more rapid return.  With the equity markets fast eliminating their pandemic losses and the currencies having erased them, the dollar stands to receive a further boost if the promise of the May payrolls report represents the entire economy.  

Japan statistics June 8-June 12

US statistics June 8-June 12

USD/JPY technical outlook

The relative strength index touched overbought territory with this week's culmination for the first time since late February.  Given the rapidity of the move and the relatively strong first two resistance lines stemming from before the pandemic rise and fall, a minor pullback is possible. The 100-day and 200-day averages combine for additional support at 108.35 while the 21-day will struggle for a week or more to catch up.

Resistance: 110.00; 110.30; 111.00; 111.70; 112.20

Support: 109.20; 108.68; 108.00; 107.30; 106.75

USD/JPY sentiment poll

The sharp gains in the USD/JPY this week have made the mean reversion tendency of technical analysis overt.  The one week view is likely to encounter and fail initially at the first two resistance lines of 110.00 and 110.30. The one month and one quarter outlook depend on fundamental developments.  If Japan and US continue to recover  from the coronavirus the faster growth of the American economy should keep the dollar moving above 110.00.