USD/JPY Weekly Forecast: An inevitable drift lower?

The diagnosis of President Trump and First Lady Melania with COVID-19 on Friday shifted markets into a mild safety scare as the illness complicates an already uncertain election. 

The USD/JPY plunged from 105.65 to 104.95 as the news hit the wires and US Dow futures fell over 400 points. But by the afternoon the USD/JPY had recovered most of its early losses and equities had cut their losses by more than half. The yen’s traditional but limited safety role was highlighted as the dollar rose in other pairs as the President’s case became known.

Hope that Congress may complete a second US economic stimulus bill buoyed markets in the afternoon but the prospects are a hostage to the election considerations of both parties.

Nonfarm Payrolls for September came in at 661,000, missing the forecast of 850,000. The larger private sector gain of 877,000 was reduced by the loss of 216,000 government jobs as schools in many places stayed closed. The unemployment rate dropped to 7.9% from 8.4% and the underemployment rate fell to 12.8% from 14.2%.

The descending channel in USD/JPY that began in late March with the pandemic market panic remained intact. Wednesday’s high of 105.80 approached the upper border at 105.90, but the close of 105.46 and the subsequent finishes at 105.52 and 105.38 were a clear rejection of a move outside the inner channel. The upper border of the outer channel is distant at 107.15. 

Monday’s open at 105.61 and Friday’s end at 105.38 evidence the lack of overall direction. The gradual drift lower over the months since the March and April panic is due to the failure to develop a convincing alternative scenario. The US has recovered but not fully and Japan remains mired in its decades-long slough. 

USD/JPY outlook

The reigning down-channel continues to order trading. Risk-off is the predominant sentiment.

Until there is a change in information from either the US or the Japanese economies there is no trading logic to challenging the prevailing direction.

The upper border of the inner channel descends from 105.80 to about 105.50 next week so even a sideways motion in the USD/JPY will, by Thursday or Friday, bring it into contact.  As we saw this week the likely response in the USD/JPY at that point is lower.

There is minor support at 104.60 but its position in the middle of the channel means that a move through has little overall import.  Above the market, the first resistance is at 106.00 followed by 106.50. Rise to these levels would not negate the incline as the wider channel which has its origin in the March panic would remain in place.

The downtrend in the USD/JPY is not a strong move based on economic or rate differentials but is the prevailing notion largely due to the lack of any alternative. A rousing recovery in the US economy would make short work of the weaker dollar but that has yet to arrive.

Japan and US statistics September 28-October 2

Japanese statistics were mixed this week.

Inflation in Tokyo was weaker than forecast on the year in September, climbing 0.2% on a 0.4% estimate and August’s 0.3% increase. Core annual CPI was flat after falling 0.1% in August.

Retail trade (sales) in August were improved rising 4.6% on the month and falling 1.9% on the year, both better than forecast. Industrial production continued to disappoint falling 13.3% on year on a -10% forecast though the monthly gain of 1.7% was slightly better than the 1.5% prediction.

The Tankan report for the third quarter was about as expected with the Large Manufacturing Outlook at -17 as predicted but the Index registering -27 on a -23 estimate. The Non-Manufacturing Outlook was -11 on a -9 forecast and the Index was -12 also on a -9 projection. The Tankan All-Industry Capex rose 1.4% on a 1.3% forecast but was down from 3.2% in the second quarter.

Consumer Confidence in September missed its 33.8 prediction at 32.7 but it was up from 29.3 in August and is at a post-pandemic panic high. It had been 38.4 in February.

In the US data, except for the NFP report, was generally good but its impact was limited as the NFP report dominated outlook.

The Dallas Fed Manufacturing Business Index, a regional assessment of the factory sector rose to 13.8 in September from 9 for the best reading in 22 months and miles ahead of the lockdown low of -74 in April.

The US economic collapse in the second quarter was slightly less deep with GDP revised to -31.4% from -31.7%. Pending Home Sales rose 8.8% in August almost three times the 3.2% prediction.

Personal Income fell 2.7% in August as more people returned to work and Personal Spending rose 1% after July’s 1.5% increase.

Initial Jobless Claims were 837,000 in the September 25 week, a bit better than predicted but the four-week moving average at 867,250 indicates that jobs are still being lost as business shuttered or at half-speed continue to fail. Continuing Claims dropped to 11.767 million from 12.747 million. 

The ISM Manufacturing Index was 55.4 in September, little changed from 56 in August and the New Orders Index registered its fourth month of strong growth at 60.2. Nevertheless, employment continued to drag with the index at 49.6 just under the 50 mark for expansion.

Payrolls as noted above missed expectations at 661,000 but the addition of 877,000 private sector jobs was reduced by the loss of 216,000 government workers including 34,000 census takers. The government reductions are largely due to continuing pandemic related closures around the country.

Consumer Confidence in September rose to 101.8 from 86.3 in the Conference Board Survey. It was the largest single-month jump in 17 years.

Japan statistics September 28-October 2

US statistics September 28-October 2

Japan statistics October 5-October 9

The preliminary Coincident Index, which tracks the entire economy for the Cabinet Office, is forecast to edge up to 76.2 in August from 76.2. The Leading Economic Index for August is expected to climb to 89.4 from 86.9.  As both are August numbers they will have no market impact. 

The Eco Watchers Survey for September, which watches regional trends, is issued on Wednesday. The current gauge was 43.9 in August, the outlook measure was 42.4.

Overall Household Spending in August is forecast to halve its 7.6% July decline to -3.7% in August. This statistic has some potential to support the yen if it is substantially better than forecast. 

US statistics October 5-October 9

The ISM Services Purchasing Managers' Index for September is forecast to moderate to 56 from 56.9. The New Orders Index is expected to drop below expansion to 44.7 from 56.8 and the Employment Index is projected to climb to 58.1 from 47.9. This information has the potential for market movement. The service sector is about 85% of the US economy and an appreciably better or worse report will reflect to the dollar in the same fashion. 

Initial Jobless Claims will be a second focus this week with a stronger or weaker number having a similar effect on the dollar. 

USD/JPY technical outlook

The Relative Strength Index (RSI) slipped below 50 on Friday. Dollar-yen's brief plummet to 104.95 and the recovery to close at 105.38 was insufficient to restore the midpoint. 

The 21-day average at 105.52 will act as a minor resistance line just above Friday's close. The 100-day at 106.60 is part of resistance at 106.50 as is the distant 200-day at 107.54 with the line at 107.50.

The distribution of resistance lines, frequent and well traded, and support lines, less common and relatively untraded, acts as an added weight on the USD/JPY. When the pair moves up it encounters well-established resistance. When it descends the support is far weaker. The path of least resistance is, as it has been for several weeks, lower. 

Considering the overall bias lower and the ease of the descent on Friday the support line at 105.00 should not provide much of an obstacle and is the initial goal for next week. The line at 104.60 is more substantial but there is little of note below it. 

Resistance: 106.00; 106.50; 107.00; 107.30; 107.50; 107.77; 108.50

Support: 105.00; 104.60; 103.95; 103.12

USD/JPY Forecast Poll

Fridays' steep drop in the USD/JPY reinforces the pair's immediate weakness with the FXStreet Forecast at the 104.60 support line. The expectations for a bounce in the one-month and one-quarter would seem to be a trend reversal as the down-channel would be below those levels at that point. However, a true reversal would likely move faster and farther once freed from the confines of the down formation with a destination above 106.50.