USD/JPY Forecast: Will upbeat China PPI save the day for USD bulls?

The Dollar-Yen pair fell to a low of 111.69 on Friday but closed just above the 200-DMA level of 111.80. The bulls made an attempt to regain control in the Asian session today, although a retreat from the high of 112.08 to 111.75 indicates the mood is bearish.

China PPI beats estimates

Reuters report says that "China’s producer price inflation unexpectedly accelerated to a six-month high in September as a construction boom shows no signs of abating and a government crackdown on air pollution triggers fears of winter shortages and frenzied jumps in commodity prices."

The producer price index (PPI) rose 6.9 percent in September from a year earlier, from 6.3 percent in August.

Why does it matter?

It is the pass-through of China's rising costs via exports that boosts inflation expectations in the US and other parts of the world (China's biggest trading partners). It is the rebound in the Chinese PPI inflation in July/August 2016 that got the reflation trade going back in July/August 2016. Trumpflation was merely an icing on the cake.

The Dollar-Yen pair fell to a low of 111.69 on Friday but closed just above the 200-DMA level of 111.80. The bulls made an attempt to regain control in the Asian session today, although a retreat from the high of 112.08 to 111.75 indicates the mood is bearish.

The chart above shows that:

• The Chinese PPI formed a nice base at 5.5% from May to July and is again inching higher. It clearly indicates that the Chinese economy is reflating again.
• Given the positive correlation, the US 10-year treasury yield could track the Chinese PPI higher

Note-

• An uptick in Chinese PPI usually pushes up US inflation expectations
• Higher inflation expectations in the US mean a steeper yield curve (big rise in long-duration yields) and a strong US dollar

Thus, an uptick in the Chinese PPI could lift the USD/JPY pair. However, technical studies indicate a minor blip to 111.00 levels is likely in the short-run.

Daily chart

A rounding top pattern coupled with a failure to hold above 112.00 this Monday morning and a drop below the 200-DMA indicates the spot is likely to test demand around the 100-DMA located at 111.13.

On the higher side, only an end of the day close above 113.00 would signal the continuation of the rally from the low of 107.32.