• USD/JPY falls on Friday’s weak US data, but remains higher on the week.

  • Markit services PMI surveys unexpectedly drops into contraction in February.

  • Poor Japanese economic data spurred the yen fall.

The dollar yen benefited from the rising confidence in the US economy and slowly ebbing fears about the China health crisis for most of the week until checked by Markit's US PMI data on Friday.

 From Monday’s open at 109.78 to the Thursday close at 112.08 the dollar had gained 2% reaching its best level versus the yen since early May last year. Wednesday’s 138 point gain from open to close (109.86 to 111.24) was the best single day run for the dollar in over three years.  The Friday 53 point decline from the open at 112.07 to close at 111.54 brought the weeks gain down to 1.6%.

Japanese statistics February 17-21


Annual industrial production for December was slightly worse than expected at -3.1% and better than the two prior months at -8.2% and -7.7% respectively but with nine negative months out of the last 12 overall production continues to contract. On the month industrial production gained 1.2% a bit less than the 1.3% estimate and the first rise since September.


The negative economic news resumed with machinery orders in December shrinking 12.5%, a third worse than the 9% forecast, the fifth negative month in six.  On the year they are down 3.5%.  

Yearly imports were down 3.6% in January almost triple the 1.3% forecast and the ninth negative month in a row.  Exports dropped 2.6% on the year, not as bad as the -6.9% forecast but the 14th straight monthly decline.


National core CPI was weaker on the year in January at 0.8% on a 0.9% prediction and overall inflation was stable at 0.7%.


The preliminary Jibun Bank Manufacturing PMI issued Friday came in at 47.6 in February missing the 49 for the 10th straight month of contraction

Japan statistics conclusion February 17-21

The consistently poor numbers from the Japanese economy especially in the important categories of industrial production, machinery orders and exports were the primary reason behind the yen’s losses this week. The partial recovery on Friday owed nothing to Japan but may have been the first ripples from China’s pending economic slowdown. If that logic holds, the same or worse impact will strike the Japanese economy in the months ahead.


US statistics February 17-21

American statistics were good and provided considerable support for the dollar until Friday .   


The New York Fed’s Empire State Manufacturing Survey jumped to 12.9 in February from 4.8 in January, nearly doubling the 7.9 forecast.  It was the best reading for this index since May.  New orders surged to 22.1, the best since September 2017 and shipments climbed to 18.9, the highest since November 2018.


The FOMC minutes of the January 28-29 meeting on Wednesday reinforced the governor’s optimistic view for the US economy while noting the unknown impact of China’s corona virus on global growth. Housing starts and building permits  for January  reflected the strong housing market with the boom in permits, up 9.2%, and the far smaller than expected decline in housing starts  likely a reflection  January's warm weather in much of the country.


The Philadelphia Manufacturing Survey for February, like the New York version, was far better than projected soaring to 36.7, well above both the consensus prediction at12 and the January score of 17. It was the highest for this gauge since February 2017 and the second best level in 27 years.  The new orders index soared from 18.2 in January to 33.6 in February, its highest since May 2018. This measure has more than trippled in three months from December’s 11.1 reading.


Markit Economics of the UK provided a surprise at week end with both their PMIs for February dropping unexpectedly, manufacturing to 50.8 from 51.9 and services to 49.4 from 53.4, in the first dip below 50 since February 2016.   

The striking difference between this survey and the two Fed indexes mentioned above may be due to the more export oriented manufacturing outside of the Northeast home of the Philadelphia and New York Federal Reserve Districts. We will know more on March 2 and 4 when the nationwide Institute for Supply Management PMI Surveys are released.

US Statistics conclusion February 17-21

Until Friday US statistics held a clear edge over those from Japan. Markit's shock did not alter the overall comparison between the countries nor the disposition of the nations’ currencies.

Of the week’s three US surprises, two, the better than forecast Fed manufacturing surveys, had little market impact.

The Markit PMIs though unanticipated, they are as yet a single set and await corroboration, do have the credit of logic. If the Chinese economy weakens as widely expected, the ripples will certainly spread around the world.

The Markit PMI numbers drew some of the optimism from recent US statistics. If the London firm is seeing the first effect of China’s economic slowdown the sense of US immunity will fade and this may well temper some of the dollar’s recent strength.  


Japan statistics February 24-28


The Coincident Index from the Cabinet Office is expected to be unchanged at 94.7 in December along with the Leading Economic Index at 91.6 from the same source.  These two indicators will confirm the 18 month decline in the Japanese economy already evident from other data.


Retail trade which tracks Japanese consumer spending is expected to show improvement in January at -1.1% on the year after falling 2.6% in December, 2.1% in November and 7% in October.  While the decline may be moderating January continues the retreat of household consumption.  On the month consumer spending it expected to rise 2.4% in January after a 0.2% rise in December.

Preliminary figures for industrial production in the year to January are forecast to be a dismal -9.5%, down from December’s -3.1% and the fourth negative in a row.  On the month production is forecast to rise 0.4% following December’s 1.2% increase.

Sales of large retail stores are predicted to slip 3.3% in January following Decembers 3% decrease for the fourth decline in a row.


Housing starts over the year will drop 6.1% in January after December’s 7.9% decline.  Starts have been negative for six months averaging -7.4% per.

Japan statistics conclusion February 24-28

Industrial production was already weak in Japan prior to the outbreak of the corona virus in China and its potential for disruption on the mainland. If the anticipated economic slowdown begins to manifest in Japanese statistics, the weakness will likely translate to the yen.


US Statistics February 24-28


Durable goods for January are expected to fall in the headline to -1.5% from 2.4% in December but to rise 1.3% from -2.4% in the ex-defense category as recent Defense Department procurement fades. The ex-transportation number is predicted to gain 0.2% after December's 0.1% drop. Finally, the non-defense capital goods ex aircraft group, the analog for business investment, is forecast to decline 0.1% after the revised 0.8% fall in December.  Fourth quarter annualized GDP should be unchanged at 2.1% after its first revision.


The PCE price index and its core version for January are the Federal Reserve's chosen inflation measures. With the core rate forecast to rise 0.1% to 1.7% price status quo is maintained and the Fed will again be able to assert when asked that inflation will rise over time to its 2% target. Consumer confidence in the Michigan Survey is predicted to be unchanged at 100.9 upon revision. 

US Statistics Conclusion

The Markit PMIs have brought this week’s information into acute focus.

Any indication that the anticipated slowdown in China’s economy is crossing the Pacific will likely drain strength form the US dollar. Its February ascent has been based on the anticipated performance of the US economy being substantially better than its rivals. The durable goods non-defense business category will be of particular interest as the drop in business investment in the second half of last year and its anticipated revival with the completion of the US-China and USMCA accords is one of the keys to the success of the economy this year.


USD/JPY technical outlook

The swift run higher on Wednesday and Thursday brought the 21-day average into a steep updraft with the 100-day average maintaining  it positive slope. The 200-day average has bottomed and adopted a gentle up curve awaiting prolongation at the new higher levels. 

The sharp move higher in the USD/JPY in the mid-week cleared all resistance lines  up to 112.00.  The first resistance is at 112.18, the high on Friday and last April and a series of lows in November 2018. Above that we have to reach for weak lines at 112.50 and 112.70  and 113.10 from December 2018. Above that we have three descending tops from November and December 2018 at 113.60, 113.85 and 114.05. 

Beneath current levels is weak support at 110.85 and 110.65, As these levels did not impede the rush higher they will not offer more than token support.  More substantial support is at 110.30 the January high backed by a weaker line at 110.10, the February top before Wednesday.  Good support exists at 109.70, 109.25, 108.75  and 108.50. 

USD/JPY sentiment poll

The week's higher conclusion in USD/JPY has mitigated the bullish view from last Friday.

The one week outlook drops to 27% bullish from 67%, bearish rises to 40% from 33% and neutral jumps to 33% from 0%. The forecast climbs to 11.31 from 109.85.

The one month view is now 15% bullish vs 35%, 82% bearish from 45% and 3% neutral from 19%. The forecast is 109.19 from 109.41. 

The one quarter view retreats to 17% bullish from 31%, rises to 76% bearish from 55%  and cedes neutral to 7% from 14%.  The forecast is 109.21 from 108.98. 

Having gained almost 2% this week dollar yen bulls have lost conviction. The one month and one quarter forecasts are overwhelmingly bearish with a rate projections beneath the lows of the past two weeks. The potential reasons for this pessimism are not hard to find from the gathering impact of the Chinese economic slowdown to lingering concerns over the corona virus. At the moment however, they are just fears. 

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