- USD/JPY falls as the safety trade advances on China virus.
- Yen continues to benefit as illness has yet to be checked.
- Factory output drops on the year but improves in December.
Dollar yen stayed the course this week until Friday when renewed concerns on the Corona virus effect on China’s economy and in turn the globe’s pushed the pair down to below 108.50. The 1.8% decline in the last two weeks is not a market decision on the competition between the US and Japanese economies but a recognition of Japan and the yen’s long standing safety status in Asia and the world.
The longer term effect on the Chinese health crisis will likely be detrimental to Japan and the yen as the mainland economy will suffer as the shutdown of many industries and sectors will continue until the spread of the illness is halted.
Japanese statistics were downbeat onthe week as factory output in the fourth quarter fell at its fastest pace on record and retail sales dropped for a third month in December likely showing the impact of a sales tax increase in October.
The factory data was not as poor as the three month total shows brecause output rose 1.3% in December after falling 4.5% in October and 1% November. Surveys by the Ministry of Economy and Trade and Industry (METI) predict gains of 3.5% in January and 4.1% in February.
The Bank of Japan kept rates at -0.1% on the 20th as expected and Governor Kuroda underlined his resolve to keep policy very loose, a goal that can only have been reinforced by the developments in China.
Japan statistics, January 27-31
The government’s consumer confidence index was unchanged in January at 39.1 which is its highest point since the two year decline from 44.9 in October 2017 bottomed at 35.6 this past September. Even this recovery is below all scores back to March 2015 excepting those of the June to November recent drop.
The Japanese unemployment rate continued at 2.2% equaling the lowest post-recession score. Retail trade rose 0.2% on the month in December but lost 2.6% on the year. Industrial productions, decreased 3% year over year in December following declines of 8.2% in November and 7.7% in October for the worst quarter since 2013. The monthly output rose 1.3% as mentioned above.
The Tokyo consumer price index rose 0.6% over the year in January from 0.9% the month prior and the same in December. The core rate was stable at 0.9% in December.
Japanese statistics, February 3-7
Deputy Governor of the Bank of Japan Masazumi Wakatabe speaks on Tuesday and board member Takako Masai does on Wednesday.
The Ministry of Internal Affairs and Communication issues overall household spending for the year in December on Thursday with a decline of 1.7% forecast after November’s 2% drop and the 5.1% decline in October. Until the final quarter spending had been positive averaging 3.8% monthly in the third quarter and 2.7% in the second.
The Coincident Index for December from the Cabinet Office that tracks state of the Japanese economy is released on Friday with a slight rise to 95.9 from 94.7 expected. The index has been falling since registering 117.5 in July and the November score was the lowest since May 2013.
US statistics January 27-31
Tuesday’s durable goods orders for December were mixed with the headline up 2.4%, much stronger than 0.5% forecast on a surge of Defense Department procurement. Business spending remained moribund and non-defense capital goods orders dropped 0.9% on a flat prediction.
The Federal Reserve status quo rate decision on Wednesday was almost universally expected but a modestly optimistic Jerome Powell did the dollar no damage. His acknowledgement of the potential economic impact of the China virus briefly stirred markets but to no lasting effect.
Thursday’s fourth quarter GDP came in at 2.1% as forecast but in the context of durable goods orders supported by government spending, which had led to some speculation for a weaker number, it was a good statistic for the dollar. Initial jobless claims four-week moving average for the January 24 week at 214,500 held at near 50 year lows indicating no change in the labor market.
Friday’s personal income for December at 0.2% missed the 0.3% prediction and November was revised 0.1% lower to 0.4% and personal spending, more important for the consumer fueled US economy, rose 0.3% as expected. The core personal consumption price index, the Fed’s well known favorite was 1.6% on the year and will provide the central bank with no incentive to change policy.
US statistics, February 3-7
Manufacturing has been the primary victim of the trade war with China. January’s PMI number on Monday is probably too soon to give the first glimpse of the post-agreement world. A slight rise to 48.0 is expected from December’s 47.2 which was a decade low. Any substantial deviation in the PMI has potential for dollar impact, especially if better than forecast since that is the speculative direction following the trade deal.
Wednesday’s ADP private employment for January is the precursor to the NFP report on Friday and 155,000 is forecast after December’s exceptional 202,000. This is NFP writ small and markets responds accordingly.
Non-manufacturing PMI for January, also at mid-week, charts executive sentiment in the dominant service sector. Business here had a much smaller drag from China and the index has never approached 50, the low being 52.6 in September. Little change is expected with 55.1 after 55.0 in December.
Payrolls on Friday is the US economy’s big gun. Job creation is forecast to be 156,000 in January following December’s slightly (very) disappointing 145,000. Annual wages will rise back to 3% and the unemployment will remain at its record 3.5%.
As every month the NFP numbers are the most watched and traded US statistic. The reaction is straightforward. Higher jobs and wages and lower unemployment boost the dollar and the reverse.
Statistics conclusion
The Japanese economy is not outperforming its US competitor and the yen has not been rising for two weeks on the basis of econometrics.
Risk is a form of fundamental analysis that is apart from contrasting economic statistics. It encompasses the stability of a nation’s political and economic systems and its likely ability to withstand great financial stress. In Asia the choice has long been Japan for the rest of the world it is largely but not exclusively the US.
USD/JPY technical outlook
As last week the decline was largely without technical considerations except for the gathering of tops and bottoms around 108.90.
The 21 and 100 day averages reflect the turn that began in September and remain pointed higher despite the two week decline . The 200 day intersects just above the Friday low and may hae provided some support. Its negative slope has been reinforced by the recent drop.
The relative strength index has turned mildly negative but probably does not indicate oversold.
First technical support exists at 108.30, Friday's low and various others from last November. The next line is weak at 107.90 followed by 107.25 also weak then 106.75, 106.50, 105.80, 105.55 and 105.00. The last three are extant from the August to September lows and are unlikely to block a concerted move lower.
Above we have 109.15, 109.50 and 109.75. Two from the recent high at 110.00 and 110.25 complete the near term picture. Long range are 110.63 and 111.00
USD/JPY sentiment poll
The change in USD/JPY fortune is clear in the poll.
In the one week bullish sentiment has dropped to 50% from 57%, bearish has risen by a equal amount 50% from 43% and sideways remains at 0%. The forecast reflects the safety trade at 108.46 from 109.88.
The one week view hints that the current safety trade may have run its course. Bullish remains at 44%, bearish rises slightly to 48% from 44% and neutral slips to 8% from 12%. The forecast falls to 108.64 from 109.34 but rises from the one week.
The one quarter view is indecisive, 43% bullish from 45%, 40% bearish from 44% and 17% neutral from 10%. The forecast is slightly lower than last week, 109.07 to 108.77 but commensurate across the three time periods.
The unpredictability of the China health crisis and the safety trade increases the longer the timeframe. It is at this point impossible to predict the endpoint of the situation and its impact on the USD/JPY except to say the longer it continues the more pressure will likely be brought on the pair.
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